(NewsNation) — The credit card in your wallet is probably unsecured, meaning you didn’t have to put down a deposit to get it, but some credit cards are secured and require cash upfront. Here’s how they work.
Secured credit cards are a way for those with a low credit score — or no credit history — to build their creditworthiness over time.
You apply the same way you would with a traditional credit card, except you’ll have to deposit cash as collateral. That money reduces the risk to your lender, providing insurance in case you don’t keep up with your bill.
The money you deposit also determines your credit line, which is how much you can spend. Typically, your credit line will be anywhere from 50 to 100% of your deposit, according to the Federal Trade Commission (FTC).
So if you put $500 in upfront then your credit line could be anywhere from $250 to $500.
According to Bankrate’s data, users with bad credit and thin credit are 46% more likely to get approved for a secured credit card than they are to get approved for an unsecured card.
How is a secured credit card different than a debit card?
I know what you’re thinking: Isn’t the benefit of a credit card that you don’t need money in your account to make a purchase? Why not just use a debit card?
Unlike a debit card, a secured credit card allows you to build a credit history because your payment activity gets reported to major credit bureaus. That means if you consistently make on-time payments, your credit score is likely to go up over time.
However, since secured credit cards are meant for borrowers who need to work on their credit, they often come with fewer perks and higher fees than traditional credit cards.
Most credit card issuers require good or excellent credit (670 to 850) to qualify for their best offers — especially if you’re looking for an unsecured card, according to Bankrate.
If your credit score is below 579, it might be worth looking into a secured credit card.
What else should I know about secured credit cards?
As with all credit cards, it’s important to shop around for the best deal. Some secured credit cards have annual fees but many don’t — interest rates also vary. And card providers often require a minimum deposit of around $200 to $300.
Bankrate also recommends finding a secured credit card that reports to all three major credit bureaus: Experian, Equifax and Transunion. That will allow you to make the most of your positive payment history later on.
Another tip: Some cards include a “graduation” component which allows you to move to an unsecured card after establishing a pattern of consistent payments. Oftentimes, you’ll get your initial deposit back once you upgrade.
Keep in mind that applying for a secured credit card could result in a “hard credit check” which may temporarily lower your credit score.
