Anyone can end up with bad credit. Whether the cause is irresponsible use in college, an innocent mistake like forgetting a bill, or failing to pay back a loan used to cover a real emergency—it doesn't matter to the major credit bureaus. Bad credit is bad credit and can seriously cramp your lifestyle or even deplete your savings if you're not careful. Worse yet is the slow and steady, long term drain bad credit will exact on your potential income.
Few of us willingly identify with having bad credit, but the fact is that one in three of us Americans has subprime credit (below 620). The good news is that, at the same time, the average FICO credit score—699 in 2016—has never been higher since the credit bureaus started tracking the number. If you have bad credit, the first thing to remember is there's no time to waste.
Bad credit is ruthless and will impact your wallet when the interest comes due next month, you need to rent a car to drive to your new job, or you start house hunting for your growing family. There are tons of ways to rebuild your credit history. And I know it can get overwhelming fast trying to figure out the best way. In terms of credit cards though, if you have a few extra hundred dollars in savings, there's no going wrong with a secured card. These cards are more often than not the safest and fastest bet to re-establish your credit.
How Secured Credit Cards Work
These first three sections are an overview of secured credit cards and the second three are a close up look at a handful of specific cards that we think might be worth considering.
The fundamentals of the secured credit card
A secured credit card is a smart choice for those trying to rebuild their credit. It works the same as any credit card with one significant difference: some type of collateral is required to "secure" or back the card before you're approved. Think of this collateral like a security deposit a landlord requires before you can rent. The landlord is taking on risk allowing you to live in the home he or she owns, so the money in hand deposit mitigates that risk in case you break or damage any part of the home.
The same idea applies to secured credit cards. Because you have bad credit, issuers view you as a riskier bet to approve a credit line. The deposit mitigates that risk for the issuer just in case you don't pay down your credit debt after all. Typically, the deposit amount will equal the credit limit granted.
How an unsecured credit card differs
On the other hand, an unsecured credit card is a conventional card that requires NO collateral. For this reason, unsecured cards are typically geared toward people with good, well-established credit. That being said, unsecured cards for people with bad or no credit do exist.
The problem is that typically such unsecured cards come with high-interest rates and hidden fees that paint them the black sheep of the group. While these cards often offer more attractive rewards and perks than secured cards, it's essential you investigate the fine print before you apply. In the shared opinion of many experts, the more traditional route to re-establishing credit is your smartest course of action—opt for a secured card and once you build back your credit back up a bit, graduate to an unsecured card with better perks.
Credit score requirements and benefits for secured cards
Fundamentally, one of, if not the primary reason you should apply for a secured credit card is to help rebuild your credit. That means understanding in detail the relationship between your score and your card is key to picking the right one. Thankfully there's a wide variety of cards out there so no one size fits all. Even still, there are some basic credit requirements and benefits you should be aware of.
Because credit card issuers require a deposit before approving you for a secured credit card, the credit score requirements are typically lower than normal. In fact, almost anyone can qualify. That doesn't mean your credit score and income size don't matter though. Banks and the major credit bureaus will consider your deposit and creditworthiness when determining the size of the credit line you'll be approved for off the bat. While you can grow this credit line over time, initially it's your financial background that counts.
Rebuild, rebuild, rebuild! Credit cards don't directly create your credit history—at least not technically. Your FICO score is calculated by the data your credit issuer passes along to the three major credit bureaus—Equifax, TransUnion, and Experian. The trick to picking a great secured credit cards is choosing the correct credit limit for you (more on this in the next section) while minimizing your interest rate, or APR. At the same time, simply using a secured credit card will not build back your credit. You have to use it efficiently. Practically, that means two things:
First, pay your bills on time.
Second, keep your credit utilization ratio—the amount you spend versus the line of credit you have—between 20 and 30%.
A great place to start is checking your credit scores through the three major credit bureaus—you can check each once a year for free! It's crucial you know your own credit history.
The ins and outs of the deposit
A secured credit card is a secured credit card because of the deposit. If all goes according to plan—that is, if you pay your bills on time—you will get your deposit back at the end of the card's term, which is typically a year. That means picking the card with great deposit terms is pretty important since you won't be seeing that money for a while. Here are a few things to keep in mind:
The first thing to know about the deposit is that, typically, it's either directly proportional or a percentage of the credit line the issuer will grant you. That means if you deposit $50, your credit line will be $50 or slightly more; or if you deposit $400, your credit line will be $400 or slightly more.
Minimum and maximum deposits vary from card to card. You can find cards with a minimum deposit as low as $50 and a maximum as high as $10,000. Generally speaking though, most card deposits range from $200-500. The amount you can put down is different from the amount you should put down. The key is to keep in mind your own finances.
For instance, just because you might have $500 in savings doesn't mean you should deposit all $500 to maximize your credit line. It's crucial you maintain an emergency fund for when that inescapable calamity hits (or at least start building one now). Otherwise, when you're hit with a $500 bill from the mechanic to replace an axle and tire, you might be forced to take out a risky payday loan or max out another credit card so you can make it to work tomorrow. At that point, new debt with high interest will likely suck more and more of your income, and the hard work you've done to rebuild your credit will be negated.
For secured credit card deposits, cash is the collateral of choice. Whereas for loans, many lenders will accept more creative types of collateral, because secured card deposits are typically only a few hundred dollars, cash is king. That being said, if you have other types of collateral, it's best to check directly with the issuer to see if there's any flexibility.
Our Top 5 Picks
There are dozens of secured credit cards out there. Without some shortcuts, you could very easily overwhelm yourself trying to juggle and compare the terms of a dozen different cards simultaneously. While there are of course many more great cards to consider, the five credit card offers we've outlined below are a great place to start your research. They're each from a different bank, recommended by a number of syndicated experts, and often are advertised as great ways to rebuild credit.
Discover it Secured Card
Citi Secured MasterCard
Capital One Secured Mastercard
Wells Fargo Secured Card
OpenSky Secured Visa
Applying for a Secured Card
The length of the application process depends on the card. The first and most important thing to check is whether the issuer will do a "hard pull" of your credit history. Such a check will take longer than a quick "soft pull," and more importantly, slightly ding your credit score itself. Typically though, once you're approved, the card should take around 7-14 business days to reach your doorstep, and often sooner! It won't be long before you are on the path to better credit.