Secured credit cards are an important credit-building tool.
Secured cards are a special type of credit card that requires you to make a deposit. The card issuer then gives you a credit line equal to that deposit. For example, you might have a secured card with a $500 credit limit and you’d deposit $500 into a special bank account the creditor could access if you didn’t pay your bills.
Since creditors don’t take any risk of nonpayment when issuing a secured card, virtually everyone can get one – even people without a credit history or with a recent bankruptcy or foreclosure. And they can help you improve your credit score as you make payments and use them responsibly.
But there are a lot of cards out there. It’s crucial that you pick the best secured credit card for you to make sure you’re getting all of the benefits this card type has to offer while limiting any potential downsides. To help you find the right card, make sure you look for these four features.
1. Reporting to credit agencies
The single most important thing to look for in a secured credit card is a promise to report your borrowing behavior to each of the three major credit bureaus. Equifax, Experian, and TransUnion collect information from creditors, and this data is used to determine your credit score. But not every secured card issuer reports to them.
If your card doesn’t report to the credit reporting agencies, it won’t end up having any credit-building effect at all. You won’t benefit from your track record of responsible borrowing behavior so you’ll just be tying up your money to get a secured card for no reason – and delaying the time when your credit gets good enough to get another card type.
2. Opportunities for regular review
Many secured card companies provide the opportunity to eventually transition to an unsecured card once you’ve shown you can be responsible. For example, some companies review your borrowing behavior every six months to determine if you’re eligible for more credit (without an additional deposit) or for a return of your original deposit.
Automatic review of your borrowing behavior can help you transition more quickly to having an unsecured card without having to close your current card or apply for a new one. That’s a huge benefit, since you want to get your deposit back but still be able to continue using your card to build credit.
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3. No fees/low fees
There are some very expensive secured credit cards out there, which market themselves to borrowers who want to build credit fast. There are also free secured cards that don’t impose this type of burden on people who are trying to improve their financial lives.
There’s very little reason to pay a high fee for a secured card when there are other creditors who want to do business with you without charging you for the privilege. Avoid cards that abuse your desire to build your score.
Finally, some secured cards let you earn rewards. While the rewards you get won’t be as competitive as those offered by cards exclusively available to people with great credit, they can still be a nice bonus. After all, why not get rewarded for spending you’re doing anyway?
Rewards aren’t the most important thing to look for – a lack of fees and reporting to the credit agencies are far more essential. But all things created equal, if there are cards that check these other boxes and give you cash back or the chance to earn points or miles, don’t pass up this great perk.
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