What are the best secured credit cards right now?
The best secured credit cards have the lowest possible annual and monthly fees. After all, your top priority should be to build credit inexpensively, and the required security deposit is fully refundable. Our editors therefore compared all of the secured cards in our database in terms of their fixed costs to identify the best secured credit cards currently on the market. Fortunately, there are more no-fee (or low-fee) secured credit cards available now than ever, as you can see from the table below.
2016’s Best Secured Credit Cards
If you use your secured credit card responsibly, you should be able to qualify for a decent unsecured card in about a year’s time. Responsible use generally means on-time monthly payments and not maxing out your spending limit. You can keep close tabs on your progress and see where improvements are needed by checking out the Credit Analysis page
of your WalletHub account.
What is a secured credit card and why use one?
As mentioned above, a secured credit card is exactly like any other credit card, with the sole exception being that you place a security deposit in opening it and, upon closing it in good standing, get that security deposit back. Other than that, there is literally no difference.
There are three main reasons to open a secured credit card: 1) to build credit no matter how bad your credit standing may be; 2) to ensure you do not spend more than you can afford; and 3) to make certain purchases that require use of a credit card.
First, if you have damaged or limited credit, a secured credit card offers the ability to build credit cheaply. With that being said, whether or not you actually use a secured card to make purchases is a matter of personal preference. Your credit score will benefit regardless based on the fact that you’ll be reported monthly to the major credit bureaus as having a certain amount of available credit in good standing. Making everyday purchases and paying for them in full will provide slightly higher gains in terms of your credit score, but if you’ve had problems with credit in the past, you may feel more comfortable simply locking your secured credit card away in a drawer.
Second, if you are concerned that you cannot spend responsibly, a secure card will help you avoid getting in over your head thanks to a security deposit that acts as your spending limit. In this manner, these types of cards “help overleveragers stay in control of their spending,” according to Dr. Irene Sharf, a professor at the University of Massachusetts School of Law.
Third, secured credit cards provide a means of making purchases that cannot be completed with cash—car rentals, hotel bookings and online shopping, for example—while also giving you $0 fraud liability.
Secured Credit Cards vs. Unsecured Credit Cards
If you have bad credit, you may be given the choice between a secured credit card and an unsecured credit card for bad credit. Which you should choose depends on why you need a credit card to begin with.
If you’re seeking a credit card simply to rebuild your credit standing, a secured credit card will be your most accessible and least expensive option.
On the other hand, if you want a credit card because you need a loan in addition to credit building capabilities, then an unsecured credit card for people with bad credit may offer you the additional line of credit that you’re looking for.
The drawback here is that the fee structure is generally more expensive. Not only will you have to pay a hefty annual fee that effectively reduces the amount of credit at your disposal, but you may even have to pay an initial processing fee before you are even given a card. That's why many people who use unsecured credit cards for bad credit end up getting very little additional credit to work with at the end of the day, defying the purpose of using such a card to begin with.
Ultimately, it's therefore usually best to wait until you have enough money to place a security deposit for a secured card. While opening an unsecured credit card for bad credit might be the quicker route for those who don't have enough savings for the deposit, it will likely turn out to be the more expensive one as well.
Why have a security deposit?
A security deposit allows credit card companies to offer essentially guaranteed approval and relatively low fees, given that it protects them from consumers who default on their credit cards. While the security deposit required to open a secured credit card often scares off consumers, it’s actually a benefit. First of all, because your monthly spending cannot surpass the amount of your security deposit, you’re far less likely to spend beyond your means with a secured credit card than a traditional unsecured credit card. Second, it’s only because of the security deposit that many consumers are afforded a
at credit card use. Finally, don’t forget that the deposit is refundable, so even though you’ll be slightly less liquid after opening a secured card to rebuild credit, you won’t ultimately be out any money as long as you do not have an unpaid balance upon closing the card.
How should I use my secured credit card in order to improve my credit?
First and foremost, make sure you don’t miss a single minimum payment. Second, add to your deposit over time, since higher credit limits look better on your credit report. Finally, make sure to only spend up to 50% of your limit each month, as lenders like to see a low utilization ratio (this is the balance on your secure card at the end of the month in relation to your credit line).
In short, your primary objective and biggest hurdle will be to avoid repeating the past mistakes that have necessitated using a secured card in the first place. "Sadly, many of the folks who get into financial trouble probably tend to be the ones who have the greatest difficulty managing their affairs, and are therefore often the ones most likely to repeat their mistakes," says Michael Floyd, a professor at the Samford University Cumberland School of Law and an expert on banking law. "I fear that buying a product to make yourself more financially responsible is no more effective than buying a health club membership or exercise machine to get yourself in better physical shape. Ultimately, improvements only happen slowly as the result of careful and consistent effort."
How can I move from a secured credit card to an unsecured card?
unsecured credit card
In general, issuers will approve you for an unsecured card after about a year of responsible secured card use (i.e. making on-time payments to all credit cards and loans.) Switching from a secured card to an
typically occurs in one of the following ways:
- You close your secured card after getting approved for an unsecured card – As long as your balance in paid in full, your secured card issuer will send you a check for the amount of your security deposit.
- Your issuer offers you a credit limit increase – If the bank that issued your secured credit card reviews your account and concludes that you have proven yourself a responsible credit user, it might offer you a credit limit increase. This would convert your secured credit card to a partially unsecured card, and your deposit will not be returned until you close this account.
- Your issuer converts your account to an unsecured credit card account – In this scenario, your existing account will remain open but your deposit will be returned to you via check or as a statement credit.