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Does A Secured Credit Card Hurt Your Credit

Does A Secured Credit Card Hurt Your Credit

does a secured credit card hurt your credit. If you have thin or poor credit, you might find it challenging to get approval for a “traditional” credit card—AKA an unsecured card. Instead, a secured credit card might be the next logical step for you.

However, since credit is an issue you’re currently battling with, you’ll want to know—do secured cards build credit? And is getting one the right choice for you? Keep reading to find out everything you need to know about secured credit cards. 

How does a secured credit card work?

A “normal” unsecured credit card is one that has a limit and you can spend up to that amount every month, with the expectation that you pay it all back or pay interest on it.

On the other hand, a secured credit card requires that you give a deposit to the lender to “secure” the credit card limit. If you wish to get a secured credit card with a $1,000 limit, most providers will need you to provide a $1,000 deposit. 

As with a traditional credit card, you’ll still need to make payments on time and in full to avoid consequences. 

Generally speaking, secured credit cards are for individuals with poor or thin credit. Lenders don’t feel comfortable giving these individuals access to unsecured credit, so the deposit helps limit the lender’s risk. If you don’t make payments, the lender can deduct the money from your deposit. 

Having a deposit doesn’t mean you’re guaranteed to get a secured credit card, though—you still have to apply and be approved by a lender. 

The credit limit on your secured credit card will depend on your lender. Typically, most secured cards start at $200 and go up to $1,000. There are some secured cards out there for as high as $10,000. 

Secured vs. unsecured credit cards

Basically, the only difference between a secured and an unsecured card is that the secured card requires a deposit. Both types of cards can positively or negatively affect your credit score.

Since a secured credit card requires a deposit, it might seem similar to a debit card or a prepaid debit card. But in reality, the secured debit card is different because it can benefit your credit profile. 

When you use a debit or a prepaid debit card, you preload the card and then spend your own money. The actions on a debit or prepaid debit card are not reported to the credit bureaus because you’re spending your own money and there’s no credit involved. 

In comparison, a secured credit card takes a deposit but extends the credit to you each month.

And since credit is being extended, all actions on the secured credit card (on-time, late or missed payments) are reported to the three major bureaus—Experian, Equifax and TransUnion. This reporting helps to build up your credit profile. 

Secured credit cards for bad credit

If you have bad credit, it’s far more likely you’ll be approved for a secured credit card versus an unsecured card. Your bad credit tells lenders you have a history of making poor financial decisions and missing or skipping payments to lenders.

As a result, lenders may hesitate to extend credit to you. That’s where a secured credit card can help. The required deposit helps lower the lender’s risk, and they’ll be more comfortable approving you for a credit card. 

Secured credit cards are an excellent option for those who want to fix their bad credit. All the actions on your secured card are reported to the credit bureaus. So, if you can make payments in full and on time, you start to build up positive credit history to combat your previous mistakes.

How do secured credit cards build credit?

Many people wonder how fast secured credit cards build credit. The answer will depend on your credit background. As soon as you open a secured credit card, the lender will send your information (spending limit, payments, balance) to all three credit bureaus every month.

If you’re a person with a thin credit file, a secured credit card can help build your credit so that you have enough information for a score in just a few months. 

Many people see a positive lift in their credit score within just six months of opening a secured credit card. Of course, if you have a long history of bad credit, it’ll take a more extended period to see a substantial impact on your credit score.

A history of negative items on your credit—such as delinquencies, bankruptcies and collection accounts—takes time to recover from. 

Luckily, if you show a pattern of responsible payments with your secured card, your lender may upgrade you to an unsecured card after six months to a year. An unsecured card gives you more financial freedom and room to breathe during emergencies. 

Plus, if you can transition to an unsecured card, you can close your secured card and get the deposit back. Ensure you continue to grow your credit by maintaining good borrowing patterns with your unsecured card as well. 

Just as responsible behaviors with your secured credit cards can positively impact your credit report, the reverse is also true. If you’re irresponsible with your card, such as if you miss or make late payments, it will lower your credit score. 

What to consider when choosing a secured credit card

When choosing a secured credit card, you’ll need to keep in mind everything you would for a normal credit card. Make sure you have a clear understanding of the fees, including the annual fees or penalty fees for late and missed payments.

Other standard fees include activation fees, credit increase fees, balance inquiry fees and monthly maintenance fees. 

Note that many lenders will subtract the fees from your deductible and your monthly limit. So, if you supply a $200 deposit but have $50 in fees, your monthly limit will only be $150. 

You’ll also want to compare interest rates. If you can pay off your card in full every month, the interest rate won’t matter, but you might not always be able to do that—so it’s best to opt for the lowest interest rate in the event you ever do carry a balance. 

If you’re interested in eventually transitioning to a secured card, ask your potential lenders if they offer that option. 

Lastly, consider also asking the lender about the process for getting your deposit back, as you’ll want this to be as straightforward as possible. 

Find a secured card with reasonable fees that work for you. Here are some of the best secured credit cards on the market right now:

  • Discover It Secured Credit Card ($0 annual fee)
  • Secured Mastercard from Capital One ($0 annual fee)
  • First Progress Platinum Elite Mastercard Secured Credit Card ($29 annual fee)

Look into these cards and others when you’re deciding which will work for you.

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