By Jason Steele
When you have bad credit, it can feel like you’re stuck in a no-win situation. In order to reestablish your credit, you need to open a new account. But few financial institutions want to offer a loan to someone with a bad credit history, since it poses a larger risk. And those that do sometimes charge exorbitant interest rates and fees.
In the credit card industry, there’s a specialized product called a secured credit card that’s available to applicants with bad credit. Compared to other financial products available for people with no or poor credit, these cards have more competitive rates and fees.
Before I get to the best (in my educated opinion) secured credit cards out there, let’s cover a few of the basics about this credit type.
Secured credit cards work much like regular credit cards, except you’re required to submit a refundable security deposit before opening your account. For people who have no established credit history, don’t have a co-signer to turn to, have bad credit, or otherwise might not qualify for an unsecured credit card, secured cards could be a great option.
In most respects, there’s little difference between a secured card and a standard, unsecured card. Here’s the rundown of how they work in three simple steps:
Secured cards require a minimum deposit, often $200 or $300, which acts as collateral to reduce your risk to lenders. With nearly all secured cards, the amount of your deposit determines the credit limit you’ll receive. Some secured card users choose to make a larger deposit to give themselves a higher credit limit. However, secured card issuers will not always match a cardholder’s deposit.
When you pay off your balance and close your account, you can receive a refund of your security deposit. Sometimes, a credit card issuer will refund a security deposit if it converts an existing secured card account to an unsecured account too.
Some secured cards will also charge an annual fee in addition to the security deposit, so be sure to factor that into your budget as needed too.
While they may share some similarities, be careful not to confuse secured cards with debit cards, which also require you to make a deposit before they can be used for purchases.
The major difference is, while a debit card reflects the amount of money you have in the banking account linked to it, a security deposit for a secured card account is only used if you default (don’t pay).
Just like a regular, unsecured credit card, you’ll still have to make a monthly payment to your secured card. And if you fail to pay the entire statement balance, you’ll incur interest on your charges. That’s why each secured card has a standard interest rate. In contrast, there aren’t any monthly payments required by debit card accounts, which don’t have interest rates.
Another key difference between secured cards and debit cards is that with a secured card, your payment history will be reported to the major credit bureaus. When managed responsibly, your secured card will add to your positive credit history on your credit report and could improve your credit score, something a debit card can never help you with.
Since secured cards are offered to applicants with bad credit histories, there are very few requirements prior to approval, though most card providers require:
Despite the fact that there’s a credit check, there’s no minimum credit score required, and nearly anyone can be approved for a secured credit card account so long as they meet the requirements above. But if you don’t have a valid Social Security number, you haven’t paid your current bills on-time or you’re in the middle of a bankruptcy, then you can expect your secured card application to be denied.
If you’re turned down for a secured card, be sure to contact the card issuer and find out why. It’s possible you could just need to provide additional information that can result in being approved.
A secured credit card account is reported to the credit bureaus just like any standard, unsecured credit card. This means that with responsible use, you can use your secured card to build or rebuild your credit. In fact, most secured card issuers advertise that they report your payment history to all three major consumer credit bureaus to help your credit score.
Responsible use boils down to two important things:
When you do these two things, you can expect to build your credit in relatively little time. For example, many secured card users find that they can qualify for a standard, unsecured card after just one year of responsible use.
Once you’re able to qualify for a standard, unsecured card, you can close your secured card account and get your deposit back. Closing your account in good standing won’t hurt your credit score.
While many major credit card issuers offer secured cards, not all do. For example, Bank of America, Discover, Capital One, Citi, US Bank and Wells Fargo all offer at least one secured card, while American Express, Barclays and Chase do not.
Furthermore, there’s no real way to know which is the easiest card to get, as all secured cards are designed for applicants for applicants with bad credit.
Many secured cards have annual fees in the $25-$50 range, although there are some that have no annual fee. While most don’t offer rewards for spending, some do. In general, secured cards tend to have standard interest rates between 15% and 30% APR, which is higher than average, but not extreme.
Now without further ado, here’s my round-up:
This card differs slightly from the typical secured card because it can offer a credit line in excess of your security deposit. To open this account, you must make either a $49, $99 or $200 refundable deposit based on your creditworthiness according to Capital One.
However, you’ll always receive an initial credit line of at least $200, and you can always deposit more money to receive a higher credit line. There’s no annual fee for this card, and it has a standard interest rate of 26.99% APR at the time this article was published.
This is the secured card version of the Discover it card, and it comes with all the features and benefits of other Discover cards.
For example, you earn 2% cash back at gas stations and restaurants on up to $1,000 in combined purchases each quarter, and 1% cash back elsewhere. Discover even matches your cash back earned during your account’s first year.
There’s no annual fee for this card, and there’s a $200 minimum security deposit. The standard interest rate is 25.24% APR.
This card can be opened with a security deposit between $300 and $4,900, and the amount you choose becomes the card’s credit limit. Benefits include a free FICO score updated monthly.
Bank of America will even review your account each month to see if you can have your deposit refunded. There’s no annual fee for this card, which has a standard interest rate of 25.24% APR.
The Self Visa® Credit Card offers a unique solution to the problem of rebuilding your credit. Self customers can designate a portion of their existing Credit Builder Account, at least $100, to be used as their security deposit to open this secured card.
This means that you won’t have to come up with new money to enjoy the convenience and security of a credit card. In fact, there’s no credit check required. Plus, you’ll have an additional account that could help you to reestablish your credit even quicker.
To be eligible, you will have to have made your first three payments to your Credit Builder Account on time and in full. There’s a $25 annual fee for this card.
Learn more about the Self Visa® Credit Card in this short, three minute video:
US Bank is a major retail bank, but you can apply for this card online and submit a security deposit of $300 to $5,000. One of the interesting benefits of this card is that you actually earn interest on your security deposit. It has a $29 annual fee and a standard interest rate of 21.24% APR.
Just like there’s no single best pair of shoes for all uses, there’s also no one credit card that’s right for everyone all the time.
For example, the Capital One card can offer an account for as little as a $49 refundable security deposit, which is lower than its competitors. Yet the Self Visa® Credit Card doesn’t require any new security deposit because it uses the equity that you’ve already built in your Credit Builder account.
And while the Discover it Secured Card offers rewards for spending, your primary goal in opening a secured credit card should be rebuilding your credit, not earning rewards.
The Bank of America secured card is available to non-US citizens, which can be the deciding factor for some applicants. Others will simply choose from one of the cards with no annual fee, although a fee of $25-$30 can be quite reasonable for the chance to build or rebuild your credit.
By closely examining the features, costs and benefits of these top secured cards, you can choose the right one for your needs.
Jason Steele is a leading expert on credit cards. His work has been featured on Business Insider, MSN Money and Yahoo! Finance, as well as on The Points Guy.