Secured credit cards are a great option for someone with a not-so-good credit. They can provide a credit card option to that person when almost every conventional financial institution is rejecting his/her application because of a bad credit score.
They can also offer a way of improving the bad credit scores and eventually take them to a high enough level where getting a normal credit card becomes possible. Before we compare the various secured credit card options, let us first understand what options a person with bad credit has as far as credit cards are concerned.
Bad credit is a challenging situation that a person may have because of many reasons. Either the person has gone through a medical emergency which led to unexpected expenses that could not be paid, or the person had faced bankruptcy in the near past, or perhaps there was a tax lien or a court order that required the affected person to pay a large sum of money which could not be afforded. Many times, bad financial habits also lead to a bad credit score. Not paying bills on time, defaulting on interest payments, etc. are some examples of financial mismanagement.
The reasons for bad credit could be plenty and its effects are also multifold. Getting loans becomes a challenge. Applying for credit cards is not so straightforward either. Getting a cell phone contract can be difficult as well. Credit cards, in particular, are a key area because many people in the United States use a credit card.
Significance of credit cards
Credit cards allow people to make purchases right away and make payments for those purchases after a few days or weeks. So, credit cards are almost a way of life. The financial infrastructure in the country is set up in a way that makes it very easy and convenient to use credit cards. Hence, not having a credit card becomes an issue.
Besides routine shopping and bill paying, credit cards also have another important use. It is used by people who face a financial emergency. An unexpected car breakdown leading to repair costs or unexpected medical expenses can be paid using a credit card if cash has run out. You get a few days of leeway by using credit cards, as you can pay off the outstanding dues when the next paycheck arrives.
So, given the importance of credit cards in shopping, bill payments, emergency funding, and a way to improve credit score, even a person with bad credit may want a credit card. Since getting a normal credit card from a conventional institution is not an issue, there are two options: secured cards and unsecured cards.
Unsecured credit cards
Unsecured credit cards are expensive and interest rates in such cards tend to be high. The user has to pay an annual fee and credit limits are generally around the $200 – $300 mark. Credit limits may increase, but that depends on your track record of timely bill payments once you start using the card. The possibility of a credit limit increase is not certain.
Additionally, as there is no collateral or security deposit, getting approval for such credit cards is not easy. This is because a person with bad credit is already a “risky” prospect. Add to that the fact that there is no security for the card issuer, it is logical to see why approval rates are low.
Unsecured cards are not recommended unless you have an urgent emergency and cannot get a secured credit card, which requires a security deposit.
Secured credit cards
Secured credit cards are the preferred option for people with bad credit. Their approval rates are a lot higher than unsecured credit cards. A successful applicant has to pay a security deposit to get a secured credit card. The deposit paid is also the credit limit of the card. So, there is some element of security for the card issuing company.
It can use money from the deposit if the user does not make the credit card bill payment. The interest rates and fees with secured cards are lower than with unsecured ones. So, it is more economical to hold on to a secured card rather than an unsecured card. Many of the secured credit card companies also send your account information to credit bureaus.
Thus, you can improve your credit score by using your secured credit card and creating a track record of timely payments.
Now let us look at some of the best secured credit cards that are available to a person who has bad credit and low credit scores (even as low as in the 300s):
Discover It Secured Card
Discover is one of the top names in the secured card space. They have what is called the Discover It card. A minimum of $200 is required as a security deposit. With that amount, you get a credit limit of at least $200. Use the limit to pay expenses or build your credit.
Account details are passed on to credit bureaus, so you can use this card, make regular payments, and start improving your credit up to a point from where you can apply for regular credit cards.
The approval process is quite straightforward and Discover looks at a reasonable amount of past credit information. So, if there are any negative items in your credit report from the past, you probably do not have to worry too much unless the items were in the immediate past.
Another plus point is no annual fee on this card. Cashback rewards program is also included with the Discover It Secured card. You get 2% cashback at gas stations and some restaurants. You also get 1% cashback on a range of other purchases. Not any secured cards have the cashback program, so this one is a bonus.
Given all the benefits of the Discover It Secured card, there are some drawbacks too. Firstly, the APR on this card is pretty high at 24.99%. However, as a new customer, you get a reduced APR of 10.99% for the first six months of use.
Capital One Secured MasterCard
Capital One is another big name in the credit card business. They have a Secured MasterCard credit card which is suitable for a person with a low credit score. Depending on the applicant’s credit profile, a deposit of $49/$99/$200 is paid for a $200 initial credit line.
The interesting thing is that everyone gets a $200 credit line regardless of the deposit amount that they pay. Capital One evaluates the credit profile and then takes the call on what the deposit amount should be. This secured credit card is a great way to rebuild your damaged credit by making expenses and then paying the credit card bill on time.
Credit limit has scope for an increase from the initial $200 limit once you make regular and timely payments for 5 months. If you are responsible while using the Capital One Secured Mastercard, there are high chances of your credit limit going up after a few months. Just like the Discover It card reviewed above, Capital One goes only up to a limited length as far as credit history is concerned. So, you need not stress out on past bad credit events.
Annuals fees are not charges with the Capital One Secured Mastercard. Capital One also offers 27/4 seamless management of your credit card account with phone support and a mobile app. Coming to the drawbacks, first is the high APR.
This card has an APR of 24.99%. Another disappointment is the absence of a rewards and cashback program. This is a no nonsense no frills secured card where you can just put your head down and slowly rebuild your credit score before moving on to fancier credit cards with multiple options.
Wells Fargo Secured Credit Card
Wells Fargo has a secured credit card that offers some of the highest credit limits in the industry. You can get a credit limit of anywhere between $300 to $10,000. Since the starting limit is $300, that is also the minimum security deposit that has to be paid for obtaining a Wells Fargo secured credit card.
Another important distinction with the Wells Fargo credit card as compared to the Capital One and Discover cards reviewed above is the annual fee. While the previous two cards did not have any annual fees, the Well Fargo card has a $25 annual fee.
However, the APR is a lot lower than the Discover It and Capital One cards. It is only 20% which is decent enough considering that this card is for a person with bad credit.
Credit bureaus are kept updated with the account information of the Wells Fargo secured credit card. So, every instance of timely payment and responsible use gets reflected positively in your credit reports. You can use this card, just like the other secured cards, to improve and push up your credit score.
Approval rate on the Wells Fargo secured card is also understood to be high. So, you are encouraged to apply even if you do not have a good credit score.
There is no cashback program with this card, but useful benefits offered by Wells Fargo include travel assistance, roadside dispatch in case of a breakdown, emergency assistance, auto rental waiver for collision, and cell phone protection plan.
OpenSky Secured Visa Card
If fast approval and quick application processing is what you are looking for, have a look at the OpenSky Secured Visa credit card. No credit checks are performed with the OpenSky secured card application.
So, you need not stress out about major negative events in your past credit history affecting your application in a bad way, unless the event is too extreme. Without a hard credit check, even your credit score does not get pushed down.
Hard checks lower credit scores by a small amount.A minimum security deposit of $200 is necessary to open an account with OpenSky. APR rates are quite low at 19.14%, which is one of the lowest in the cards reviewed in this article.
This card reports all account information to three major credit bureaus. Thus, you can expect to see an improvement in your credit profile provided that you use the OpenSky Secured visa card responsibly and pay your bills on time.
The OpenSky secured visa card does not have any rewards or cashback program. It is simply a normal secured credit card that allows you to get out of your bad credit gradually until you can apply for cards with all sorts of benefits and features. The application process is fast and it does not go into your detailed credit history. For all these benefits, you do pay a $35 annual fee.
USAA Secured Platinum Visa Card
USAA cards are available to members of USAA, which means you need to be in the military or be a former military personnel to become a USAA member. This card will be of special interested to anyone with an armed forces background.
This card is slightly different from other secured cards because instead of paying a security deposit, you buy a certificate of deposit for 2 years. The amount can be anything between $250 to $5000 and the CD amount becomes your card limit.
This card does come with an annual fee of $35. However, APRs can be quite low. The normal range is from 11.65% to 21.65%. However, if you are currently in service and are deployed, then you get an APR of 4% for up to 12 months of deployment. That is one of the big draws for the USAA Secured Platinum Visa card.
Another feature worth noting with this USAA card is no foreign transaction fee. While most other cards charge 3%, this one charges nothing. Other benefits are rental collision waiver, travel and baggage insurance, and extended warranty on certain products purchased through the card.
Some things to keep in mind
Now that you have read details of four top quality secured credit cards, you will have a basic understanding of the main features that are offered with such cards and how you can compare different secured credit cards for bad credit. While you do your research, keep in mind the following points:
- Keep an eye on the fees: There are various kinds of fees that credit cards charge, from monthly fees, one-time fees, to annual fees.
You want to read about these fees because it is essentially the cost of owning the secured credit card. You will have to pay those fees with your hard earned money.
- Apply with the best possible credit score: While you cannot completely control your credit score before applying for a secured card, you can definitely try and put your best foot forward. Before you apply, try to clean up first.
Pay all the bills that are outstanding and that you can pay. Credit card bills, utility bills, etc. Close out any small loans of you can. The better your credit profile, the better it will be during the application process. Small actions can lead to significant gains.
- No card or credit limit is guaranteed: Nothing in this world is guaranteed and secured credit cards are no different. Do not think that by applying for a high-approval rate secured card, you are certain to seal the deal.
It is completely possible that in spite of doing all the right things your application gets turned down. Similarly, credit limit increases are also not guaranteed. They depend completely on the call that the credit card company takes. You just have to keep trying and follow best practices.