Without a line of credit, it is impossible to build or rebuild your credit. Checking accounts and debit cards will not help because a financial institution must loan you money to report positive information to the three major credit bureaus.
However, if you have no credit or have had serious credit problems in the past, it can be extremely difficult to get approved for a conventional credit card.
Secured Cards Can Help
If you are having trouble getting approved for a credit card, a secured card could be the answer for you. It works just like a traditional credit card, but it requires a refundable security deposit before the account is open. Just like a standard card, if the statement is not paid in full each month, interest charges will accrue. Cardholders must also make at least the minimum payment.
Secured credit cardholders can earn many of the same rewards that unsecured credit cards offer, such as purchase protection and travel insurance. The largest benefit for those looking to build or rebuild their credit, though, is the fact that secured card issuers will report your payment history to the three major credit bureaus. Often, secured cardholders who have paid their bills on time for a year see an increased credit score that will allow them to qualify for a traditional credit card.
Choosing the Right Card
Before you select a secured credit card, it is important to understand the terms and conditions, as they may be different than those offered by traditional card issuers. Pay close attention to:
- Grace period. The grace period is the time period between the statement closing date and your due date. If a credit card offers a grace period, you can pay the full balance during this time period and avoid interest charges. While some secured credit cards offer a grace period, which is generally between 21 and 25 days, some do not.
- Interest rate. If you carry a balance on your secured credit card, you will have to pay interest, just as you would with a traditional card, and these rates can vary. For instance, the Primor Gold card has a 9.99% fixed APR, while other cards can soar into the teens and twenties. Make sure you check the interest rate for purchases, cash advances and penalties, as these may all be different rates.
- Annual fee. While many secured credit cards require you to pay an annual fee, the exact amount can vary from card-to-card. The Capital One Secured Card, for example, has no annual fees, while some credit card companies charge as much as $49 each year.
- Other fees. Secured cards may have fees for late payments, returned payments, cash advances and foreign transactions. For example, while the Capital One Secured Card does not charge foreign transaction fees, most credit cards charge a 3% fee for purchases made outside the United States.
- Benefits. While secured credit cards are basic products, some do provide benefits. The USAA Secured Card American Express, for example, provides rental car coverage, including collision damage waiver and theft. It also offers a one-year extended warranty for products you purchase in the United States. The Capital One Secured Card provides price protection policy. If you purchase an item but then find it somewhere else for less within 60 days, you will receive a statement credit for the price difference.
- Credit score access. Many credit card companies offer free access to your credit score either online or printed on your monthly statement. This is a great way to keep an eye on your credit score, and watching your score go up can give you the motivation you need to maintain the healthy credit card habits you are building. The Capital One Secured Card offers a Credit Tracker app that gives you free access to your credit score. They also provide other tools, such as a what-if simulator.
- Path to a traditional credit card. If your secured card issuer also offers unsecured credit cards, you may be able to upgrade your card after a few months of on-time payments. At that point, your issuer will likely refund your security deposit.
Tips for Success
You will want to open a secured credit card soon so that you can start building or rebuilding your credit as soon as possible. It is also important to make on-time payments. As stated above, secured credit card issuers report positive or negative payment information to all three credit bureaus. You do not want to jeopardize your growing credit with a late payment. Your credit card provider may offer email or text payment alerts, so take advantage of those.
Secured credit cards can help you build or rebuild your credit. If you choose wisely and read the fine print, you are sure to find a product that is right for you.