The Canada Mortgage and Housing Corporation says the average credit score is around 770. That’s pretty good, but if you have a credit score that’s lower, you might worry about being able to get a loan or a credit card.
There’s good news, though. It’s possible to rebuild your credit and improve your credit score. One popular option for credit recovery is secured credit cards. To get one of these cards, you put down a security deposit equal to the amount of “credit” you’re receiving.
Of course, you want to be sure that you’re choosing the best card for you. If you’re feeling a little overwhelmed by the choices you have, don’t fret. This guide will help you make the right choice.
Compare Fees for Secured Credit Cards
The first step in finding the right secured credit card for bad credit is comparing the fees. Much like unsecured cards, the card issuer will leverage some fees.
You may encounter the following fees:
- Application fees
- Processing fees
- Annual fees
Each card will have a different fee structure, so be sure to compare them. One card may have a low annual fee, but high processing fees. Another may waive the application fee but charge a high annual fee.
The goal here is to make sure you pick a card that isn’t going to cost you a lot in the long run. The point is to use this card to help rebuild your credit, so paying a lot for it doesn’t make much sense.
High fees may also affect your credit score. If you don’t expect the fees, you may find you can’t make your payments on time. This can have a negative impact on your credit score, which is the exact opposite of what you want.
Ask about the Minimum Security Deposit
Most secured credit cards have minimum security deposits. Keep in mind that your security deposit often matches the credit limit on the card.
Since you have to put the money down upfront, you may want a card that has a low minimum security deposit. This is also helpful for rebuilding credit since it keeps your payments manageable.
Some cards will have high minimums, which may put them out of your budget. If you’re unsure that you’ll be able to manage a card with a high limit, it’s a good idea to rule out any high minimum cards. Stick with the lower end.
Keep in mind that some cards will allow you to have a limit higher than your security deposit. This may be an attractive option if you can’t spare much for the security deposit. Be sure that you can handle the payments on the credit limit before applying for one of these cards.
What Are the Benefits of the Card?
Most secured credit cards help you rebuild your credit. That means the card issuer needs to report to one of the major credit bureaus. This way, they can record your on-time payments, your credit usage, and more.
If the card issuer doesn’t report, none of this information will be in your credit history. It won’t have any impact on your credit score.
Some secured credit cards have benefits that go beyond rebuilding your credit. Some credit card issuers may place your security deposit in a savings account. Some may even offer you the chance to earn interest on the security deposit.
Other secured credit cards will offer you the chance to switch to an unsecured credit card. This option may happen after you’ve made so many on-time payments.
What’s the difference between secured vs unsecured cards? Unsecured cards don’t need a security deposit, and they usually have higher credit limits. They also have lower fees or even no fees at all.
Of course, if the secured card you choose doesn’t offer the option to switch, that’s not a huge problem. After you rebuild your credit, you should be able to apply for an unsecured credit card anyway.
Very few secured cards offer miles, points, or other rewards. There are a few that do, but you’re unlikely to really rack up the points with this type of card. There are more important factors to consider with secured cards.
What is the APR?
APR stands for annual percentage rate. This is the interest rate applied to the balance on your card after the grace period.
Most secured credit cards have higher APRs than unsecured cards. That’s because secured cards are offered to people who have bad or no credit. This can make you look like a higher risk for the card issuer, so they want to charge higher interest.
You can avoid paying interest by paying off the balance of your card in full every month. Most cards come with a 21-day grace period for purchases.
Paying your card balance off in full can also keep interest from compounding. Compounding interest can further increase your finance charge on the card.
Interest rates may make your monthly payments more or less affordable. Few secured credit cards offer competitive rates, though, and the credit limits are often quite low.
The APR is less important than making sure the card issuer is reporting to a credit bureau. You should consider it, but it may not be the make-or-break factor it can be for unsecured cards.
Credit Recovery Can be This Simple
Choosing between secured credit cards can feel a bit overwhelming at first. By considering each point, you’ll be able to choose the best-secured credit card for your situation.
Credit cards aren’t your only option when it comes to building or rebuilding your credit history. If secured credit cards don’t seem like the right fit, you can also explore credit-building loans and other options.
Ready to discover more financial tools to help you recover your credit? Get in touch and learn more about the options you have to improve your finances now!