Pros and Cons of Secured Credit Cards

Pros and Cons of Secured Credit Cards: Table Summary

Pros	Cons
Lower Fees Than Subprime Unsecured Credit Cards	Need A Security Deposit
Can Control Credit Utilization Ratio	Cannot Access Deposit While Secured Card Is Open
Credit Limit Can Never Be Reduced or Decreased	Most Report As Secured
No Credit Check Secured Cards Available
Can Graduate To Unsecured Card With Same Issuer
Reports to 3 Major Credit Bureaus - Can Build Credit
No Collection Calls If You Default

I have always held the view that if you are a rebuilder or new to credit, secured credit cards are perhaps the best type of credit card to build your credit. And here are the reasons why I think they are good.
 

Pros

Less fees (compared to subprime unsecured credit cards)

Secured credit cards are cheaper to have than subprime unsecured credit cards. Subprime credit cards take risk on people with bad credit and since the risk of non-payment and delinquency is higher is you have bad credit, subprime issuers tend to charge higher interest rates and also ding you with a variety of fees. Aside from annual fees, you might be asked to cough up a one-time application or processing fee and even monthly fees on top of annual fees.

Let's use a card like Total Visa as an example. After you are approved, you get hit with a $89 "processing fee". During the first year, the annual fee is $75. During the second year onwards, it is reduced to $48 but they then charge you a monthly fee of $6.25. In constrast, a secured credit card like Opensky has just a $35 annual fee and even guarantees your approval because they do not perform any credit checks.

In contrast, most secured credit cards just charge you an annual fee ranging from $0 to $50 and that's it. No processing fee or monthly fee. In fact, many issuers like Discover, Citi and Capital One do not charge any annual fee at all. So if you get one of these no annual fee secured credit cards, all you end up is putting up a deposit which you will get back once you close the card or graduate to an unsecured credit card.
 

Can Control Your Credit Utilization Ratio

While having to put up a deposit is a negative for secured credit cards, used wisely, it can help even more than an unsecured credit card. And the reason is that because you determine the amount of deposit, you are actually controlling your credit limit and not the credit card issuer. Most subprime unsecured credit cards give only an initial limit of $300. That is a very low limit but since you have bad credit, you can't expect credit card issuers to start you off with a high limit, can you? Some issuers like Credit One has a track record of increasing your credit limit over time while others like Milestone and Indigo do not (hence you are stuck with a $300 as long as you have the card).

With a secured credit card, you decide what amount you want to deposit (and hence your credit limit). You can start with $200 and increase it over time or straight out with $1,000, $2,000 or even $5,000. Having a higher credit limit allows you to use your card more for convenience and still maintain a low credit utilization ratio. If you are not aware, one of the most important things that affect your credit score is how much credit are you using out of your total available credit (ie your credit utilization ratio). Credit bureaus recommend a low utilization ratio of at most 30%. That means that if you have a $1,000 credit limit, you should charge no more than $300 to your card. If your initial deposit is only $200, then you should use no more than $60.

Since most unsecured credit cards that target bad credit give you a limit of only $300 to $500, you cannot charge a lot to the card. That may not be a problem for some of you. But if you need to rent a car and give a credit card number to secure your booking, then that might be a problem. A secured credit card with a large enough deposit solves that problem and you will have a higher credit limit on your credit report.
 

Your Credit Limit Can Never Be Reduced

If you have an unsecured credit card, you credit limit can be reduced through no fault of yours. During the 2008 financial crisis, many cardholders and especially business credit card holders had their credit limit reduced through no fault of theirs because credit card issuers wanted to reduce their overall risk. Some issuers have also reduced credit limits during the Covid-19 pandemic. If you have a secured credit card, your credit limit will never be decreased or reduced because your security deposit is used as a collateral.

No credit check secured cards available

This does not apply to the vast majority of secured credit cards but there are a couple that do not check your credit score and hence you are almost certain of approval. And this is good news for those of you who have got denied for a few credit cards and got some hard inquires on your credit report. Though many subprime cards claim to "give you a chance" even if you have bad credit, you might get denied (and many other people have). You can even be denied for a secured credit card.

Fortunately, secured cards like Primor and Opensky does not perform any credit check and you will get approved as long as you fill in your details correctly in the application form and put down your deposit.
 

Could graduate to unsecured card with same issuer

Another great advantage of secured cards is that if you get one with a mainstream issuer, many of them allow you to graduate to an unsecured credit card. Let us use Discover as an example, Their secured card does not have any annual fee, has a cash back program that is the same as their Chrome card and you even get benefits like having access to your FICO score for free. For those who have no credit history, Discover will review your account in as little as seven months and graduate you to an unsecured card. Your card number remains the same, your deposit gets returned and you simply continue using the same card. You might even get a credit limit increase.
 

Reports to Major Credit Bureaus - Builds Your Credit

The most important benefit of a secured card is that like regular credit cards, they help you build or rebuild your credit history because they report to all three major credit bureaus (Experian, Equifax and TransUnion). Some might report your card as secured while others might report as unsecured. But to the credit bureaus, it does not matter. What matters is that you pay on time and have a low credit utilization ratio.
 

No Collection Calls If You Default

If you default on a secured credit card, the issuer will take your security deposit since it is a collateral against you defaulting on them. Hence, you will not face any calls from collection agencies. This obviously should not be a reason just to get a secured credit card. But it is good to know that if there are some unfortunate circumstances, you will not face harassment from collection agencies.

Cons

You Need a Security Deposit

The biggest drawback for a secured credit card is that you need a put down an initial deposit. This alone has deterred many of you from getting one. Some of you have got your credit dinged because you could not pay your bills on time and some have gotten into collections. You did not have enough cash flow to pay your bills. If you are still in this situation, then you should focus on getting your cash flow in order before thinking about rebuilding your credit. No amount of rebuilding or credit cards will help of you do not earn enough to pay your bills.

If you earn enough to pay your bills but do not have an emergency fund, then focus on building an emergency fund first before getting a secured credit card.

But if you have positive cash flow and you have an emergency fund, you should not let the deposit deter you from getting a secured credit card. Most unsecured credit cards have all sorts of fees which you have to pay. You might have to deposit upfront with a secured card, but you will always get back the deposit when you graduate or close the card. With unsecured credit cards, those fees are gone and they could add up to hundred dollars a year just on fees alone.

No Access To Deposit While Secured Credit Card Is Open

While the secured credit card is opened, you have absolutely no access to the security deposit. Many folks misunderstand that you can use the security deposit to pay your credit card bills. That is incorrect, the security deposit is there to secure your credit line and protect the issuer if you do not pay your bills and default. So while the secured credit card is opened and you are using it, you are tying up that cash. You will only get back your deposit if you close the card or if the card graduates to an unsecured credit card (if the issuer has a graduation program).

Reports As Secured

Most secured credit cards reports the account as secured in your credit report although there are some that report as unsecured. To be honest, this is not a big deal at all as your credit score does not depend on how it is reported. It might just bother some of you.

Summary

Secured credit cards remain an excellent tool to build or rebuild your credit. I would focus on getting one with no annual fee which allows you to graduate. If you already have been denied, then consider those which do not do any credit checks.
 

What Came Before?

List of secured credit cards

What are secured credit cards and how do they work?

What's Next?

How does deposits on secured credit cards work?

What should a typical deposit be on a secured credit card?

How to use secured credit cards wisely?

How fast can secured credit cards build credit?

How many secured credit cards do you need to build credit?