Building strong credit is arguably one of the most important things you can do for yourself. It can affect everything from getting a loan, to renting an apartment, and to even getting a cell phone plan. But building or repairing your credit doesn’t happen overnight; it’s something that takes time. If you’re committed to improving your financial wellness, it could be time to consider a secured credit card.
Secured cards are a great way to help establish credit for the first time and can even help you repair credit if needed. A secured card is a little different than an unsecured card, as secured cards are funded by the cardholder. So instead of a bank or credit union extending you a line of credit, you front a deposit that’s then used as your credit line. However, not all secured cards are created equally.
Here’s what you should be looking for in a secured credit card:
1. A credit limit that feels right.
Secured cards require a security deposit from the applicant, usually falling anywhere from $200 to $500.
“Let’s say you put down a $500 deposit. If approved, the issuer will then extend a $500 credit line,” said Justin Zeidman, manager of credit card products at Navy Federal Credit Union. Borrowing against your own money may seem pointless, but the reward for good behavior is priceless.
“Like a normal credit card, your activity will be reported to the credit bureaus, so make sure to make on-time, monthly payments. By using your card responsibly, you’ll prove to the issuer that you understand how to handle credit,” said Zeidman.
2. Avoid being bogged down by fees.
The last thing anyone should have to worry about while trying to build or repair credit are fees. Avoid secured cards that charge annual fees or foreign transaction fees.
“Secured cards are about building strong financial habits and getting comfortable with credit. Find a secured card with no fees and use your card how and where you want to — and focus on making those monthly payments,” added Zeidman.
3. A credit monitoring tool.
Look for a card that provides you with free access to your FICO score so that you can track your progress as you use your secured card responsibly. “Actually seeing the impact that responsible credit can have on your credit score helps to reinforce positive habits and makes it easier to celebrate your progress as you work towards your credit goals,” said Zeidman.
4. Ability to earn rewards.
Rewards aren’t a guarantee with secured cards, but some financial institutions do offer rewards opportunities for secured card holders. Take Navy Federal’s nRewards Secured credit card, for example, which allows you to earn rewards for the purchases you make. Those reward points can be redeemed for gift cards, merchandise and everyone’s favorite – cash. Although a decent secured card doesn’t require this kind of rewards program, if you’re working to build up your credit you might as well get rewarded while doing it!
5. A chance to upgrade.
A secured card is a great introduction to building credit, but eventually, you’ll be ready for something a little more advanced. Some issuers will automatically upgrade you from a secured card to a non-secured card if you continue to practice strong financial habits. For example, starting at six months, Navy Federal will review your account monthly to see if you’re eligible to be upgraded from their nRewards secured card to their cashRewards unsecured card. A bonus not many other financial intuitions offer.
Secured cards often act as a stepping stone into the world of credit cards, but they come in all shapes and sizes. Do some research and find a card that fits your needs. Finding the right secured card could be just what you need to get things back on track.