Good credit is the foundation of a solid financial future. When you build your credit score you can get access to more forms of credit which can significantly enhance your life.
Without good credit you will find it challenging to get approved for a mortgage or a car loan, and even your application for a new credit card might be denied.
Many people in the UK do not have a good credit score and do not know what they should be doing to build credit. That’s where a secured card can help.
What is a secured card?
Secured cards are a great financial tool for anyone, regardless of credit history, to build credit and take back control of their financial future. There is only one major difference between a secured card and and a regular credit card. Whereas a regular credit card requires no deposit and is considered “unsecured”, a secured credit card by its very name is a card that has been “secured” by the borrower in the form of a deposit made to the card issuer. This amount is usually equal to the desired credit limit on the secured card. In all other aspects, a secured card and a regular credit card work in the same way. Both allow the card holder to transact online or at retail locations, both require minimum payments, and both report repayment activity to the credit agencies.
Secured cards are the easiest type of card to get as there is minimal risk to the credit card issuer. The security deposit shifts the credit risk away from the credit card issuer as they will keep the deposit if the borrower defaults on payments.
How can a secured card help build credit?
Rebuilding your credit isn’t impossible, but it can feel just a little bit overwhelming. A secured card makes it easy. As long as the secured card reports account activity to the credit reference agencies, it will help build credit in the same way a regular credit card does.
The card issuer passes certain information to the credit agencies and this information is used to determine your reliability as a borrower. The information that has the biggest impact on your credit score is your payment history and your credit utilization.
- Payment history. Do you repay what you owe? If you do not make at the very least your minimum payments it will reflect very negatively on your credit score.
- Credit Utilization. How much of your available credit do you use? If you constantly max out your credit cards it will impact your credit score, but not in a good way..
The key to using a secured credit card to build credit is to use it responsibly. Paying what you owe on time, and keeping a low balance on your card are the best ways to do that.
Who is a secured card suitable for?
Almost anyone can get a secured card. The key is having the deposit required as collateral. However, there are specific groups of people that would get the most benefit from a secured card:
- Anyone with a poor credit score that has been denied for other forms of credit, such as loans, unsecured credit cards, a car loan or mortgage
- Anyone concerned about spending outside of their means and finding themselves in serious credit card debt. A secured card prevents you from charging more to a credit card than you can afford to repay
- Anyone who has been through an Individual Voluntary Agreement (a formal debt solution to pay back debts over a period of time, also referred to as an IVA) or bankruptcy and needs to rebuild their credit.
- Newcomers to the UK who have not yet been able to build a solid credit foundation that is acceptable to credit card issuers.
- Students or recent graduates looking to build a solid credit history for the first time.
- New business owners who need the ability to pay vendors using a credit card, but have either been declined credit for their business or who are only offered minimal credit at an exorbitant APR.
- Ultimately, anyone trying to rebuild or build their credit score. You don’t have to have poor credit to want to improve it.
With responsible use, your credit score will increase and you will eventually be able to be approved for credit that matches your financial goals.
What is a secured card not?
A secured card is not a prepaid credit card.
First and foremost, prepaid cards do not help build your credit score. Consider a prepaid card to be more like a debit card but you can use it to make purchases where credit cards are accepted and debit cards are not. With a prepaid card, funds are loaded onto the card and as the card is used, the funds deplete. On the other hand, a secured card works just like an actual credit card. You are provided with a credit limit equal to the deposit you made and as you use the card, your available credit decreases.
Like a regular credit card, there’s a minimum monthly amount due with a secured card, and as the card balance is paid off, the available credit goes up again. Usually, you are given a 30-day grace period before interest starts to accrue on the purchases. However, did you know, Score Mastercard by DND does not charge interest on outstanding balances making it the most accessible, affordable card in the market to build credit?
What do secured card issuers do with the deposit?
When you are approved for a Score Secured Mastercard and make your deposit, it is placed into an interest-earning account. This isn’t standard across the board. Some deposits don’t earn a penny of interest.
When is the security deposit returned?
Your security deposit is returned after you close your account. If your account balance is zero you will be eligible for a full deposit refund. If you have an outstanding balance, the credit card company may use your security deposit to pay off the balance and any outstanding fees before refunding you the remaining amount.
How can I get a secured card?
Step One: Find and apply for a secured card that works within your needs and requirements. Consider the card’s interest rate and fees, the minimum deposit required, what you would need as your card’s limit, and any perks or rewards that come with the card. For example, the Score Secured Mastercard(R) offers card holders 1% cashback on purchases!
Step Two: Pay the refundable security deposit.The amount of your deposit becomes your spending limit. The credit card company holds your deposit as collateral and in most cases (but not all as is the case with the Score Secured Mastercard) the funds are kept in a custodial account that does not generate interest.
Step Three: Once you receive your card, use it to make regular payments for items such as petrol or your weekly shop. You can spend up to your credit limit but it is advisable to then pay it all off by the due date each month, otherise, as mentioned above, you are utilizing too much of your available credit which works against your score.
Step Four: ALWAYS pay at least the minimum amount due by the due date (but if you can, ideally pay off your total balance). Paying your credit bills on time is the number one factor that will impact your credit score.
Step Five: When your credit score has grown to the point that you qualify for an unsecured card, you can either keep your secured card to have two lines of credit on your credit report, or close the account and get your deposit back. You’ll have to bring your account balance to zero first, or the card issuer will subtract what you owe against the security deposit. Keep in mind that closing any type of credit account, including a secured card, will decrease your total available credit and a higher credit utilization ratio could lead to a lower credit score.
Pros and cons of a secured card
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Pros of a secured card
- It's easier to be approved for a secured credit card than for an unsecured one.
- Secured cards are usually reported to credit reference agencies just like a regular credit card.
- Secured cards can help you build credit.
- Your security deposit is only used if you default on your payments.
- You may be able to earn rewards or other incentives like cashback.
2. Cons of a secured card
- Some secured credit cards have higher interest rates and more fees than unsecured cards. The Score Mastercard, however, gives you a fresh start at the lowest APR in the UK.
- It can be difficult to come up with the security deposit. However, this is such an effective tool to build credit that it's worth setting aside even £5 a week until you have enough of a deposit. Remember, you get this money back with interest when you close your account.
Bottom Line
What makes a secured credit card unique is the fact that a security deposit is required in order to obtain one, making it suitable for anyone with a low credit score who struggles to qualify for other forms of credit. A secured card allows otherwise “risky borrowers” to access a form of credit which can show the credit agencies they are capable of borrowing, and paying back what has been borrowed.
The Score Mastercard(R) is an affordable, accessible UK card solution that has been built specifically to change people’s financial future by avoiding the pitfalls that can so easily be experienced with poor or no credit. It is the safest and most affordable way to build credit. Apply for your Score Secured Mastercard and start building for tomorrow, today.
Are you ready for a higher credit score?
