When a lender considers your application for a credit card, they look at your credit history or score as one of many factors. For those with bad credit, this may result in a denied application since lenders often won't want to take a risk on someone who may not be able to pay the money back.
However, secured credit cards may be available to you even if you have bad credit. These cards offer a credit line to those who may not qualify for traditional credit cards. Not only can secured cards help those with lower scores get access to a real credit card account, but they can help build credit scores over time.
How do secured credit cards work?
When looking at a secured credit card, you won't be able to tell them apart from a traditional credit card. They both offer a quick and secure way to pay at retailers and online and come with some card benefits, like protection against fraudulent purchases. They are issued by major banks and have the backing of Mastercard, Visa, and American Express.
What makes secured cards unique is their deposit. Before you can get access to a $200 credit limit, for example, you need to pay a $200 cash deposit at the time of your application. This deposit guarantees that the lender gets their money back if you make $200 worth of purchases, no matter what happens.
Secured credit cards also allow you to charge purchases and repay them, which gets reported to the credit reporting agencies. This can increase your credit score over time, just as long as you pay the bill on time each month and don't go over your limit. (Just be sure you work with a secured card that reports your credit history; most do.)
The cash security deposit makes you a less risky borrower since it guarantees the lender won't lose any money. This means even those who don't qualify for regular credit cards may be approved for a secured card account.
Do secured credit cards offer guaranteed approval?
Secured credit cards are designed for people with no credit or poor credit. They make it easier to get access to a credit card, even if denied for a traditional account. While they aren't a sure thing, they are much easier to get because the security deposit reduces much of the risk.
Still, denials do happen. Common reasons for a bank to deny a secured credit card application include:
- Very low credit score — It's possible for your score to be too low for even a secured credit card. Most lenders have a minimum score to meet.
- No ability to repay — If you don't have an income or a way to meet your financial obligations, you could be turned down.
- No money for the deposit — You must be able to pay the deposit at the time of application. Otherwise, reapply when you have the funds.
A lender can also use other information from your credit report to make an application decision. If you have recently been through bankruptcy or have a judgment against you, lenders may decline your application until you get these things taken care of or a significant amount of time has passed.
Some secured credit cards do not do a credit check to get approved, and cards like Pesto use gold or jewelry as the deposit and don't require cash. Consult the terms of each card account before applying to see if you qualify.
Getting approved for a secured credit card
The most important part of applying for a secured credit card for bad credit is filling out the application. You'll want to include all that they ask for, including income. Most credit-related information will be verified with your credit report, so it's best to be honest. For those cards that don't check your credit score, you'll be using your income information and security deposit alone to help them make a decision.
You can improve your chances of getting a "yes" by filling the application out completely and having the cash for the deposit available immediately. If, for some reason, you can't get approved on your own, getting a co-signer to help you may result in getting access to a secured credit card.
Building credit with a secured credit card
Not all secured credit cards report to the credit agencies, so verify this before you apply. If they do, there are things you can do to ensure your card activity helps build your credit score.
- First, use the card to make a purchase and then pay it off immediately each month.
- Don't carry a balance from month to month. You'll have to pay interest (up to 30% ARP or higher) and risk not being able to pay it off responsibly.
- Keep track of the purchases you make so you don't go over your limit. Use online account management tools to see what you've spent.
- Sign up for account alerts. These will tell you when you're close to your spending limit and if any unauthorized activity has taken place on your account.
- Use free credit score tools to monitor your score over time.
When you've used your card responsibly for six months or more, some cards will offer the chance to switch to a traditional credit card. Others let you request one after some time. Check your card terms and conditions for details.
Whether you have a secured card or a traditional card, watch your utilization ratio. This number is the amount of credit you have available compared to the amount you use. By keeping account balances low (as close to zero as possible), you keep this ratio healthy, which can improve your credit score.
Final thoughts
It's easier to get secured credit cards for bad credit, but there is no guaranteed approval credit card. Both secured Visa and secured Mastercard cards require you to keep balances low and watch your spending over time. With care, they can help you establish yourself as an excellent credit risk and get access to better financial opportunities.
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