Opening a credit card account is a solid way to build financial security, but for many people, getting a credit card is difficult due to unfavorable circumstances, namely, bad credit. Fortunately, there is still a way to qualify for a credit card even if your credit score is low or non-existent. One possible solution is to apply for a secured credit card.

What is a secured credit card?

A secured credit card is one that requires you to make a security deposit before it can be used. The security deposit determines your initial credit line, and after that, the card can be used as a regular credit card. Once you decide to close your secured credit card — perhaps after you’ve built up a good enough credit score to upgrade your card — the security deposit will be refunded to you. Any remaining balance you have after you close it would be taken from your security deposit.

How exactly does a secured credit card work?

For reference, here’s a quick run-through of how a normal, unsecured credit card works. You first submit an application to a credit card company containing basic financial info about yourself. The credit card company then compares the info you’ve provided with your credit report in order to assess how much of a risk you are in terms of paying back your balance on time. Depending on the company’s assessment, you will be granted a credit card with a determined credit limit and interest rate. In many cases, a credit card company can deny your application altogether if your credit report is non-satisfactory. Assuming you qualify for a credit card, you can begin making purchases and paying off your balance by the due date.
Again, that’s how unsecured credit card works.

If you are someone who has an undeveloped credit history, a secured credit card may be an excellent alternative to an unsecured one. Secured credit cards are very similar to normal ones, except the process for opening them is a little different. Instead of submitting an application and having your credit history assessed, a secured credit card only requires a refundable security deposit to get started. This security deposit can range anywhere from $200-$2500, which is great for people who have the cash but not the credit score.

Once you’ve determined the amount you want to deposit, the card-issuing company will grant you a credit card with a credit line equal to the amount you’ve deposited. So if you decided to submit an initial security deposit of $500, your credit card limit will be set to that same amount.

At this point, you may use your secured credit card in the same manner in which you’d use a normal credit card. In other words, secured credit cards are seen as no different than a normal credit card to all card-accepting vendors. You will even find that many secured credit card companies offer some of the same cardholder benefits as regular credit cards.

Pros and Cons

Like with all financial choices, there are some cases in which secured credit cards are either advantageous or disadvantageous depending on your circumstances. Below are some pros and cons to using a secured credit card:

Secured Credit Card Pros

  1. Low barrier to entry: One of the biggest reasons to get a secured credit card is because you can qualify for one even if your credit score is bad or just underdeveloped. If you have no credit history and are looking to get started, a secured credit card is a great option since you only need to supply the initial deposit. Even for people whose credit scores might have been damaged over time, a secured credit card will not be determined by that bad score and may even help to rebuild it.
  2. Helps build credit: Having a good credit score is your ticket to obtaining the best loans and interest rates on things you’ll need in the future. Building your credit score is possible with a secured credit card because the issuing company reports your on-time payments to the three major credit bureaus. Also, since you’re opening a secured credit card with the money you already have, this fosters good financial habits and sets you up with a credit limit that is within your means.
  3. Cardholder benefits: Many secured credit cards offer the same cardholder benefits that regular credit cards do. These include renter’s insurance and extended warranties on certain purchases. In addition, some secured credit cards grant free credit monitoring so that you can track your credit development over time.

Secured Credit Card Cons

  1. No cash back bonuses: It is extremely rare for secured credit cards to feature cashback or travel bonuses. By using a secured credit card, you would essentially be missing out on free money for making purchases.
  2. Higher interest rates: Often times a secured credit card will set you up with a higher-than-average interest rate on unpaid balances. This can be avoided if the card is routinely paid off before each billing cycle, but it can also lead to money loss if not paid off in time. Getting stuck in a feedback loop of high-interest charges could lead to a worse financial situation than you began with.
  3. Low max credit line: While the security deposit process of secured credit cards is a good way of getting your foot in the door to financial maturity, most card issuers offer a low range between the minimum and maximum initial deposit allowed. This means that your credit line ceiling is relatively low, barring you from making larger purchases with your credit card.

What are the qualifications for a secured credit card? 

As mentioned above, qualifying for a secured credit card is simply a matter of having the initial deposit already on hand. You would then need to research a card that provides the benefits you want, and then fill out an application containing your basic financial info. If you are approved for the card, you will then need to provide the info of the bank account that you’ll be transferring the deposit from.

It is important to note that a card issuer will still run a credit report to make sure there are no serious negative marks on your credit history. Things like bankruptcy or insufficient income may still cause you to be denied. If you are ever denied for a secured credit card, the issuer is required to send you the reasons why. From there you can determine what other options are available.

What is a secured credit card good for? 

For one, they are safe and effective ways to build a credit score. Whether you are just becoming financially independent or are trying to recover from recent hardships, a secured credit card can be your ticket to reaching new financial heights. Secure credit cards are also a good way of enjoying cardholder benefits such as rental insurance or extended warranties which could save you money in the long run.

On the other hand, secured credit cards are bad for earning cashback and travel rewards. Those who are seeking to gamify their spending habits will not find solutions in secured credit cards. They are also bad for people with good or excellent credit. Due to the credit line limits and high-interest rates, people with great credit should seek to maximize benefits with a normal credit card or else risk losing money over time.