A history of missing credit card payments, filing for bankruptcy or other financial stumbles can make it difficult to get a credit card. However, you have another option. Applying for a secured credit card allows you to rebuild or establish your credit history while enjoying most of the privileges of borrowing with a traditional credit card.
With a secured card, you put up a deposit with the issuing lender in a specific amount that serves as collateral. You then can borrow on your card up to that amount. For example, if you put up $1,000, you will be able to charge up to that amount on the card.
A secured card can be a great option for people with bruised credit or those who want to ease into building a credit history, says Mike Sullivan, personal finance consultant with Phoenix-based Take Charge America, a nonprofit credit counseling and debt management agency.
“I like secured cards,” Sullivan says. “I think there are benefits for everybody.”
[Read: The Best Low-Interest Credit Cards of 2018.]
The Benefits of Using a Secured Credit Card
Lenders and borrowers both can benefit from secured cards. Banks offer secured cards because they are a low-risk form of lending, says James Philpot, associate professor of finance and director of the financial planning program at Missouri State University.
“They have a credit limit that is secured by your deposit,” he says. “So as a result, the bank is taking very minimal risk because they have that account there that they can pounce on if your bill’s not paid.”
The cards also can help borrowers because they offer a relatively safe way to rebuild a credit history and boost your credit score, especially if no lender will offer you a traditional card.
“Indeed, it is a credit card — it’s not a debit card,” Philpot says of the credit-building ability of secured cards.
Sullivan says that secured cards offer other advantages over traditional credit cards. For starters, using a secured card makes it more difficult to get deeply into debt. “You can’t really exceed your credit limit, so it’s tough to get in trouble by spending too much,” he says.
Secured cards also offer the same spending conveniences that you get with a traditional credit card — namely, the ability to shop at a swipe without having to carry around excess cash.
“You can use it any place where you can use a regular card,” Sullivan says. “So, the benefits are multiple.”
[Read: The Best Secured Credit Cards of 2018.]
The Disadvantages of Secured Credit Cards
Secured cards also have a few disadvantages. For example, if you need to make an unexpectedly large purchase, your card might let you down. “If you take out a $500 secured card and you find yourself in a situation where you have to pay for a car repair that’s $575, you can’t do it,” Sullivan says.
In addition, despite the many benefits of using secured cards, borrowers typically resist using them unless forced to do so, Sullivan says. “It’s kind of frowned upon; there’s a stigma attached to it.”
That negative view comes from the widespread perception that you only get a secured card when you cannot get a regular credit card, Sullivan says. “And I think that’s unfortunate,” he adds.
Philpot says secured cards also can be dangerous for people who simply cannot get a handle on their spending. “So much of this goes to human behavior and personal discipline. If the person hasn’t changed the underlying spending habit, the underlying credit management habits, then ‘here we go again.'”
Who Should Use a Secured Credit Card?
People with poor credit make up the vast majority of borrowers who apply for secured cards, Sullivan says. For those with a spotty spending history, a secured credit card can be a way to wipe clean the borrowing slate.
“Those people who have already had bad habits, it’s kind of a way to force them to develop new habits,” he says.
However, Sullivan says others also can benefit from using secured cards. “I would like to see more people use secured cards, especially as a first card,” he says. For example, secured cards make sense for older teens or young college students. Using such a card can help a young person develop good spending and budgeting habits without the risk of falling into debt.
“So many first-time users do overspend their credit cards, do use them to excess, do use them to create income that isn’t there,” Sullivan says. Because secured cards prohibit borrowers from giving in to such temptations, the cards are “particularly valuable for young people who have never had a regular credit card,” he says.
[Read: The Best Rewards Credit Cards of 2018.]
Moving From Secured Credit Cards to Traditional Credit Cards
Most people who apply for secured cards do so with the hope that their lender eventually will offer them a traditional credit card.
Using credit responsibly is the most important factor in getting such an offer, Philpot says. So, be wary of repeating past spending mistakes. “Odds are if you have a secured credit card, you are there because probably at one point you did not show a lot of discipline in spending,” he says.
To avoid overspending, Philpot recommends using a secured credit card to spend modestly but regularly. Doing so allows you to build a history of responsible use.
Philpot suggests using your secured card to pay for just one recurring expense, such as gasoline for your car. “It’s a fixed thing; it’s something we’re regularly doing,” Philpot says. “Most of us are not going to break ourselves buying gas.”
Over time, carefully using a secured card builds better spending habits.
“The card allows you an opportunity to try to learn or relearn spending discipline, as well as credit management discipline — the habit of paying off every month,” Philpot says.
Sullivan says that eventually, your credit issuer is likely to notice your improved spending behavior. “What typically happens is if somebody uses a secured card for a period of months and they use it well, they are going to be offered a traditional credit card,” he says.
How long will you have to wait for such an offer? It varies, Sullivan says. “It depends a lot on your starting point.”
For example, if you start with a credit score of around 600 and spend responsibly, a lender might offer you a “fairly good deal” on a traditional credit card in as little as nine months, Sullivan says. On the other hand, if your score is closer to 450, it’s probably going to take a lot longer because it takes a while to repair more extensive credit damage.
“It can take years if you have terrible credit and you’re trying to rebuild it just with a secured card,” Sullivan says. “You can’t be in too much of a hurry. It’s going to take you about as long to get out of trouble as it took you to get into trouble.”
The recipe for getting out of trouble is simple, Sullivan says.
“You have to be very, very consistent in paying that secured card on time in full each month,” he says. “You’ve got to establish that habit so there’s never a late payment or ever a reason for people to question how you’re managing that account.”
If you want to speed up the process of moving from a secured card to a traditional credit card, Philpot suggests calling your lender directly and asking whether you are eligible to move to a traditional card. “Never underestimate the power of a customer service rep on the other end of the line, or the manager of a customer service rep,” he says. “You never know what they’re able and willing to do if you just ask.”
Converting a Secured Credit Card to a Traditional Credit Card
In some cases, a lender might offer to simply drop the securitization on your secured card and convert it to a traditional credit card. But Sullivan says it is much more likely that you will be offered a new, traditional credit card. He urges you to open a credit card account with a lender with whom you have an existing relationship or a lender you would like to work closely with in the future.
Closing a secured card to open a traditional credit card account might cause your credit score to drop a bit, but the impact should be negligible, Sullivan says.
Once you have spent responsibly for a period of time — and after your lender reports that conscientious activity to credit reporting agencies — it is worth shopping around to get the best rate possible, Philpot says.
“The credit card industry is cutthroat competitive — all you have to do is go look at your mailbox to see that,” Philpot says. “It’s always worth looking around.”
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