If you have bad credit or skimpy credit history, it can be tough to get approved for a credit card. Secured credit cards, which require you to make a deposit to get approved, offer a solution to this problem.
The deposit on a secured card works by providing collateral for your credit card account, reducing the card issuer’s financial risk so it’s more willing to issue you a credit card.
What is a Security Deposit for a Credit Card?
A security deposit is a refundable deposit that serves as collateral for the secured credit card. The credit card issuer holds the deposit and only uses it if you default on your credit card balance.
It’s important to understand that you can’t use your security deposit to pay your monthly credit card bill.
Generally, your security deposit is equal to your credit limit. The credit card issuer may increase your credit limit after a certain time if you make on-time payments or provide an additional security deposit.
Read the specific terms of the credit card you’re applying for to find out how and when you can increase your credit limit.
If you use your secured credit card responsibly, the card issuer may offer to convert it to an unsecured credit card and refund your security deposit.
Not all secured card issuers offer an unsecured option, so check the terms of the credit card you’re applying for if you’re interested in this feature.
Where to Get a Secured Card
Many banks and credit unions offer secured credit cards, although the deposit amounts vary. It’s good to do some investigating and compare what each card offers. Some require a low deposit but offer a limited line of credit.
The APR for cards will vary, so shop around for the best rates. However, secured cards’ annual rates are always higher than with an unsecured credit card.
Keep your secured card for only as long as you need it and switch to an unsecured card when you can.
What to Look for in a Card
The point of a secured credit card is to build or rebuild your credit, so you want to choose the card that will do that best. It should report to all three credit agencies and you should be aware of the APR.
Avoid cards that charge an application fee, and investigate any card before you invest in it. Compare the other fees as well, because some cards offer a very low APR, but charge more in other ways. Choose a card that gives you a credit limit of at least as much as you deposited.
Using a Secured Credit Card
The best way to use your secured card is to make a few purchases that you then pay off when the statement comes. Secured credit cards aren’t meant to carry a balance.
Linda Sherry, editorial director of Consumer Action, advises that “It helps to pay in full every month to show you’ve got this excellent credit rating.” Paying your secured card off every month shows that you are using your credit responsibly.
When Do You Get Your Secured Credit Card Deposit Back?
It’s reassuring to know that your secured credit card deposit is refundable. But exactly when will you get the money back? In most cases, your security deposit will be refunded once your account balance is paid off and the account is closed.
Sometimes when your secured credit card is converted to an unsecured credit card. Review the card’s terms and conditions for the issuer’s rules about when you can get your deposit back.
Even if you don’t plan to use your secured credit card anymore, there may be a good reason not to close the account.
Closing a credit card account could increase your credit utilization ratio, the amount of available credit you’re using, which can hurt your credit score.
Instead of closing the card, see if you can transition to an unsecured card with the same credit card issuer.
For instance, some issuers will automatically offer you an unsecured credit card after you’ve made on-time payments on your secured card for 12 months.
Others require you to request an unsecured card. Once you’ve transitioned to an unsecured card, the card issuer will refund your security deposit, minus any outstanding fees.
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How to Get a Credit Card Without a Security Deposit
If you want to avoid putting down a security deposit, consider working on improving your credit scores. This is so you can qualify for an unsecured credit card. Secured credit cards can help by giving you the chance to prove you can use credit responsibly.
Before you apply for a secured credit card, make sure the card issuer will report your payment history to the credit reporting agencies. Once you get a secured credit card, work to improve your credit score.
This is done by using the card to make small purchases every month.
Going forward, focus on paying all of your bills on time—this is the single biggest factor that can help you attain a good credit score. Setting up automatic payments can help ensure you never miss a due date.
If you have any outstanding late payments, bring them current as soon as possible. And pay down credit card debt to ensure your credit utilization ratio remains below 30%.
To calculate your utilization ratio, divide your total credit card balances by your total credit limits.
Check your credit report to make sure all the information there is correct, and dispute any items you believe to be inaccurate. You’re entitled to a free credit report from each of the major credit bureaus (Experian, TransUnion and Equifax) every 12 months at AnnualCreditReport.com.
You can also check your Experian credit report for free every 30 days. Also, consider getting your free FICO® Score from Experian to see how your efforts are paying off.
Finally, if you pay phone and utility bills, using Experian Boost™ may also help increase your credit score. This free service uses your utility, phone, and other telecom bill payments to help improve your FICO® Score.
Putting down a deposit on a secured credit card may be painful, especially since you can’t use that deposit to pay your credit card bills.
But keep in mind that you can get your deposit back. But that is once you close your account or convert it to an unsecured credit card.
Ultimately, the deposit on a secured card is a small investment in building a good credit score. As well as a robust credit history and a better financial future—and you can’t put a price on that.
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