While we at ReadyForZero don’t recommend using credit cards, there is one type of credit card that can sometimes be useful for people who are climbing their way out of debt. That type of card is a “secured credit card.”
The reason a secured credit card is different than a regular credit card is that it works more like a bank account than like a loan. You start off by making a deposit and the amount of your deposit becomes your credit limit. So if you make an initial deposit of $1,000, then your credit limit on the secured card would be $1,000. When you get the card, you can borrow against your deposit to make purchases on it, and you get billed every month just like a regular credit card. The difference is, since you’re essentially borrowing from your own money, you’re not going into debt!
And the benefit of using such a card is that it can help you rebuild your credit after having credit problems in the past. If you are at the point where you want to improve your credit but you don’t want (or are not eligible for) a traditional credit card, then you might decide to apply for a secured credit card.
In most cases, your monthly payments to a secured credit card will be reported to the credit bureaus and reflected on your credit report.
Of course, there are a few things to think about before getting a secured card. For one thing, most secured credit cards have an annual fee, and they also charge you interest if you carry a balance over from month to month (even though you’re borrowing against your own deposit).
Additionally, the amount that you use to secure the credit card is not money that you have access to in order to make payments. This money is kept in a separate account, and can be claimed by the credit card issuer if you stop making payments.
So, what are the best secured cards?
With all this in mind, we wanted to take a look at the options and see if we could identify some of the best secured credit cards out there. We looked at factors such as annual fees, interest rates, credit limits, and customer service. If you are looking for a secured card to help you begin rebuilding your credit, here are some good options to consider:
A lot of secured credit cards have high fees and high interest rates. However, the Digital Federal Credit Union secured card bucks those trends. In fact, this card has rates more comparable to unsecured cards.
The APR for this secured card starts at 11.5%, and there is no annual fee. You won’t even be charged a cash advance fee or a higher APR for cash advances. This is rare even for the best unsecured cards. You do have to join Digital Federal Credit Union in order to get this card. The good news, though, is that the membership requirement is pretty easy: Just make a $10 donation to Reach Out for Schools, an education nonprofit.
This card is on our list partly because USAA is known for having good customer service, which can be a really important benefit when you need help or have questions. USAA is a bank that caters to military service members, but is open to anyone.
When you apply for this card, you also open a two-year certificate of deposit (known as a CD) with USAA. Your deposit will remain in the CD while you use the card, and your deposit will equal the credit limit for the card. The annual fee for this card is $35, and the APR is 9.9%.
US Bank also charges an annual fee – in this case, $35 – for its secured credit card. And with this card the interest rate is higher, with an APR of 21%. So if you get this card, you’ll want to be sure to pay off your balance every month. This card is on our list because it does allow for a higher deposit and higher credit limit than many others (up to $5,000).
This card also comes with a few perks that you wouldn’t see on many secured credit cards. For example, you can get discounts from car rental companies, which is a nice bonus.
With the Capitol One Secured Credit Card, you do need to pay a $29 annual fee, but that’s not as high as some of the other secured credit cards out there. One thing to note is that Capital One has a tiered approach to your collateral deposit, depending on your credit. With this card, unlike many other secured cards, it does allow you to increase your credit limit above your own deposit, but we’d recommend not doing that. If you keep the credit limit in line with your deposit, then you don’t risk going into debt with the card.
A secured credit card can be used to rebuild or build credit. It can be a good way to establish a credit history. However, just as you would with any credit card, you need to make sure that you use your card responsibly, paying off the balance on time each month. If you have more questions about credit scores, see our Credit Score Resource Center. And if you have any questions about secured credit cards, let us know in the comments below.
Image Credit: Kate Hiscock