Has this happened to you? You’ve applied for credit cards in the past, and you’ve been denied. Now you’re wondering if you’ll ever qualify for a card of your own. How can you prove you can manage a card if no one will give you the chance?
The good news is that you do have options with a secured credit card. This is an invaluable tool, allowing you access to credit and giving you the opportunity to build your credit and qualify for an unsecured card down the road.
Is a secured credit card right for you? Check out these five big benefits that come with a secured credit card:
1. You don’t need perfect credit to qualify
If your credit score is fair or poor, you may not be approved when you apply for an unsecured credit card. A secured credit card is different. Because you’re required to put down a security deposit in order to open a secured credit card, it’s less risky for a credit card issuer. So, even if you have a lower score, you may still be able to get one of these cards in your name.
Keep in mind that a secured credit card is not the same as a prepaid card. With a prepaid card, you cover your purchases with cash from a debit account. (And, unlike secured credit cards, prepaid cards have no impact on your credit score.) When you use a secured credit card, however, you’re truly purchasing with credit. Cash is held as collateral in case you don’t pay your bill, but the card lets you charge against a genuine credit limit. You receive a monthly bill and pay toward that balance regularly.
2. Your credit limit is tied to your security deposit
As the name may imply, secured credit cards are secured by a cash deposit held in a collateral account. When you apply for a secured credit card, you’re able to request the credit limit you’d like — typically between $250 and $5000 — based on the amount of funds you have available and want to use to secure the account. That money will stay in a savings account. And, provided you don’t get too far behind on your card payments, you should receive that deposit back — sometimes with interest — when you close your card or graduate to an unsecured credit card.
3. You can reap the benefits of an unsecured credit card
You can use your secured credit card just as you would an unsecured card:
- Enjoy the convenience of using your card at millions of retailers worldwide.
- Make hotel, airline, or car rental reservations — transactions that typically require a credit card.
- Experience the protection of fraud prevention, detection, and resolution services offered by your card issuer.
Once you’re set up with your secured credit card, you can enjoy the convenience of using a credit card for everyday purchases — all while making payments each month toward your balance, just as you would with an unsecured card. Best of all, with responsible use of your secured credit card, you can work toward improving your credit score.
4. Your credit can improve with responsible card use
Here’s where your secured credit card shines. Unlike a debit card or prepaid card, your secured credit card can actually help you build or rebuild your credit.
Most secured credit card issuers report your monthly payments and card balance, among other factors that go into your credit report, to the three major credit bureaus. These agencies gather the data that make up your credit history report and ultimately determine your credit score.
Using your secured credit card responsibly can have a positive impact on your credit over time. Adopt these good habits to help improve your credit health:
- Make your payments by their due dates every month. Pay at least the minimum amount owed each month on time. Timely payments play a major role in the calculation of your credit score.
- Aim to keep your balance low. It’s okay to use your credit card, but aim to spend no more than 30% of your credit limit. But it’s important to note using 30% or less of your credit limit is a general guideline and everyone’s situation may vary.
- Pay your full balance whenever possible. Paying at least the minimum amount owed each month will keep your account in good standing. But, paying the full balance each month will help you save on interest and ensure you’re not spending more than you can afford to repay.
5. You can graduate to an unsecured card
A secured credit card is meant to be temporary — a bridge between having no credit card at all and qualifying for an unsecured card. How long that journey takes depends on your credit profile and how responsibly you use your secured credit card and manage other factors that go into your credit report and score.
When you do qualify for an unsecured card, you can leave your secured credit card behind and have your security deposit returned to you. Unsecured cards require no deposit and may offer higher credit limits, lower interest rates, better terms, and rewards programs. Keep in mind when looking to close your secured credit card account, however, that closing accounts and lowering your available credit may lower your credit score.
Check with your secured credit card issuer to discuss how you can “graduate” to an unsecured card. Many institutions offer unsecured cards, so upgrading your card may be as simple as requesting the change when you qualify. As with any credit card, make sure your unsecured card fits your needs and spending habits.
Ready to apply for a secured credit card? Visit your nearest M&T Bank branch or call us at 1-877-378-1276 to get started.
For access to additional financial education resources, for wherever you are on your financial journey, visit our Financial Education Center.