4 questions to ask to score the best secured card
Understanding underwriting requirements is key to a successful application
With dented or nonexistent credit, getting a credit card can feel like a Catch-22 proposition: If you don’t have one, you can’t get one.
That’s when many consumers turn to secured cards. In exchange for a deposit that works as collateral and often equals the credit line, consumers get a working credit card with a low credit line. Since the card issuer seems to merely let cardholders borrow from their own money, many people think all it takes to obtain one of these cards is to have the cash and apply.
Yes, you can be turned down
Even though you have to pay a security deposit, many applicants will be declined for secured cards.
“Generally, the acceptance rate is very low,” says Aaron Bresko, vice president of consumer lending with BECU (formerly the Boeing Employees Credit Union). Less than half of those who apply get approved, he says.
That’s because secured cards also vet their applicants, examining income, obligations, assets and many times – ironically – credit. “There’s always got to be some kind of underwriting,” says Nessa Feddis, senior vice president with the American Bankers Association, an industry trade group. “It’s going to be different than for unsecured cards.”
Even with secured cards, issuers must consider the ability to repay, says Feddis. Card issuers don’t want a customer to fail, she adds.
Another little-known fact about secured cards is that some cater to people with bad credit, while others are marketed for people who have no credit. Apply for the wrong one, and you may not meet the criteria.
But if you research the underwriting before you apply and shop for the type of card that will benefit your unique situation, you can narrow your options to those cards for which you’re most likely to be approved – and avoid multiple, score-damaging credit inquiries along the way.
Here are four questions you should ask as you shop for secured credit cards:
1. What are
the debt-to-income requirements?
Many issuers have their own formulas for comparing your income to your regular bills. Issuers find out what works for them, and there are different ways to go about it – all valid, says Feddis.
If they use a true debt-to-income ratio, most secured card lenders are likely looking for a number that doesn’t exceed 40 to 50 percent, says Bresko.
Some issuers will include all your monthly obligations. Others will look at only some items, such as rent. And Primor’s Gold and Classic secured cards, for example, just require $100 left over each month after the bills are paid.
On the other hand, some have minimum income thresholds, too, says Bresko. For a BECU secured card, applicants must earn at least $12,000 annually.
If you’re applying at your own bank or credit union, the issuer might look at your account, says Feddis. It wants to verify that you’re managing bills consistently and well.
Because getting a secured card also involves opening a savings account (to hold the collateral), the issuer may run you through ChexSystems, a national accounts database, says Rob Levy, managing director of the Center for Financial Services Innovation, a research and consulting firm. So, if you have a history of bounced checks or overdraft charges, you could be declined.
2. Will you
look at my credit score?
Not every secured card lender will look at credit scores. But many do.
The lower the score, the higher the interest rate – even with a secured card, says Theresa Benitez, a certified credit counselor with American Financial Solutions, a nonprofit credit counseling agency in Washington state.
Benitez advises to focus on the fees and “don’t panic on the interest.” If you pay off the balance every month – which you’ll want to do in order to take advantage of the credit-building benefits of a secured card – you’ll never pay interest.
Before you start applying, find out if your credit problem is “no credit” or “bad credit.” Start by pulling your credit report. If you have few or no line items on your credit history, then you probably have no credit score – especially if any accounts on your report are fairly new.
On the other hand, if you have an established history, but the past seven years are littered with overdue bills and defaults (or a bankruptcy, foreclosure or short sale), you likely have a bad score – generally, anything below the mid-600s. If that’s the case, find out exactly what you have to work on by paying a few bucks to buy your score – or get it for free at CreditCards.com. (Checking your own credit score won’t hurt your score.)
Once you know if your problem is “bad credit” or “no credit,” that will shape how you shop for a secured card:
- If you have bad credit: Ask issuers which credit scores they use, and what number they need to see. (Warning: Each of your scores from the three major credit bureaus can be slightly different, and they can also change from month to month, as new bills are reported to the bureaus.) If they look at your credit history, what do they need to see on it, and what would get you declined?
- If you have no credit/no score: Shop for an issuer that specifically states it doesn’t require credit history or minimum credit score for approval (There are quite a few, including cards from First Progress, Applied and Unity banks.)
Savvy move: Ask how often and to which credit bureaus the issuer will report your on-time payments. To build good credit, you want an issuer that reports to all three bureaus (Experian, Equifax and TransUnion) every month, says Joe Ridout, spokesman for advocacy group Consumer Action.
Examples of this are the Discover it Secured and the primor Secured Visa Gold cards.
3. Will you
run a credit check?
As you’ll find out when you ask secured card issuers about their underwriting, many pull a credit report. Also known in industry slang as a “hard pull” or “hard inquiry,” a credit check by a lender for the purpose of granting credit can knock a few points off your credit score. And it can have a bigger impact if the score is already shaky or if you don’t have much credit.
Also ask if and how many times the issuer will pull your credit. “Some issuers will not pull your credit, so they’re not underwriting in the same way others are,” says Ridout. “If you know your credit score is deplorable, you may want to look for one of those.”
Hard inquiries stay on a credit history for two years, but are factored in the score just for one year.
Video: What is a secured card?
4. How does
the collateral deposit work?
If you have no credit or truly bad credit, you’ll likely have to put up $1 in collateral for every dollar of your credit line.
For those with credit that’s less damaged, some issuers – such as Capital One with its secured Mastercard – will also offer a $49 or $99 collateral deposit in exchange for a $200 credit limit.
If you shop secured cards, you’ll notice that the minimum deposit is rarely less than $200, says Ridout. According to BECU’s Bresko, the average minimum required is about $250.
Maximum deposits can go as high as $5,000 on some cards. And to ramp up that credit score, plan on using no more than 30 percent of your credit line and pay it off in full each month. That will also eliminate interest, which can be high on secured cards, says Benitez.
So, if you want to increase your chances to be approved for a secured card while keeping any potential dent on your score at bay, make sure you understand the income, credit and collateral requirements of all your possible options before applying.
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