The biggest reason why someone would use a secured credit card is to rebuild bad credit. Secured cards are the best tool for the job because they offer nearly guaranteed approval and report account information to the major credit bureaus each month. So as long as you always pay the bill on time, positive information will gradually cover up past mistakes, improving your credit score. Secured cards are also much cheaper than unsecured credit cards for bad credit. And you can thank the refundable security deposit that you’re required to place to get a secured credit card for most of that. The amount of your deposit usually becomes your credit limit, preventing you from spending more than you can afford to repay and reducing the risk for the issuer.
Because they’re inexpensive and easy to get, secured cards also make good starter credit cards for people with no credit history. But you can probably qualify for a solid unsecured card, too, especially if you’re a student. Similarly, a secured card might make sense if you want a credit card so you can rent cars, book hotel rooms and shop online but are nervous about overspending.
As a result, secured credit cards are best for three types of people: those with bad credit, limited credit and a desire not to overspend. And there are five main reasons why secured credit cards are great for those groups.
Here’s why someone would use a secured credit card:
High Approval Odds – You can get approved for a secured credit card no matter how damaged your credit may be. Some secured cards don’t even do a credit check on applicants.
Low Costs – Secured cards tend to have very low annual fees, thanks to their refundable security deposit. Just make sure to pay in full every month because they aren’t known for attractive APRs.
Credit Improvement – Secured cards are indistinguishable from unsecured cards. If you pay your monthly bills on time and otherwise manage your account responsibly, your credit score will improve.
Budgeting – By making your spending limit equal to the amount of your security deposit, secured cards prevent you from borrowing more than you can afford to repay.
Convenience – A secured credit card allows you to make purchases that can’t be completed with cash, such as car rentals, hotel bookings and online shopping. You’ll also benefit from the security of $0 fraud liability.
If you’re worried about missing payments or falling into bad habits, remember that you can still benefit by opening a secured credit card, activating it and never actually using it. Even though there won’t be activity on your account, your payments will be listed as on time when the creditor reports information to the credit bureaus each month. You can’t be late on a payment when none is due, after all. This will benefit you month after month, improving your credit score over time. Just don’t forget to pay your annual fee, if any, and the rest will take care of itself.
To learn more, check out WalletHub’s secured credit card guide. You can also check your latest credit score for free on WalletHub as well as identify opportunities for improvement with our personalized credit analysis.