Credit cards can be of huge benefit. They allow you a secure way of paying for goods and afford more protections that are offered by standard debit cards.
However, credit cards have a catch: you have to pass a credit check to obtain one.
What Is A Credit Check?
A credit check is essentially a grade for how trustworthy you are as a borrower. The primary consideration for most lenders is your credit score; a three-figure number which represents how likely you are to pay back borrowed money, based on your previous financial behavior. If you have debts, have missed payments in the past, or have made multiple applications for credit, then it will negatively impact your credit score.
Lenders don’t want to lend money to those who historically have shown poor financial management, so they will set criteria for their lending. They may decide, for example, that they will grant a credit card to anyone with a credit score over 700. If your score is 625, then you will be declined.
There’s no way of knowing exactly where each lender sets the bar for an “acceptable” credit score. All you can do is hope your score is good enough for the lender as per their individual criteria.
What Is A “Good” Credit Score?
The FICO credit score chart states the following:
- Credit score of < 550. Bad; unlikely to be approved for credit.
- Credit score of 550-649. Poor; many lenders will consider you a “subprime” borrower.
- Credit score of 650-699. Fair; you may have to pay higher interest rates for your borrowing.
- Credit score of 700-749. Good.
- Credit score of >750. Excellent.
If your credit score is less than 700, then you may have trouble passing credit checks. The US average score is 687, meaning a huge number of people will find their credit card applications declined. Furthermore, just going through an application that involves a credit check can impact your credit score. This may only be by a few points, but every time you undergo a credit check, you will experience this damage to your score. If your score is already struggling, then trying to avoid any additional checks is a wise decision.
If you are unable to obtain a standard credit card, or just don’t want your credit score to endure any additional searches, does that mean you’re cut off from obtaining a credit card?
The answer is no. Though it’s a little more complicated than a standard application; what you need is a secured credit card.
What Is The Difference Between A Standard and a Secured Credit Card?
Standard credit cards work as follows:
- You apply for the card.
- You receive the card.
- You use the card.
- You pay back to the card the money you have spent (i.e. clearing your balance or making minimum payments).
Secured credit cards work a little differently:
- You apply for the card.
- You make a security deposit of funds to the card.
- You use the card
- You pay back the card as with a standard card
Secured cards are secured for the lender. They will provide you with a credit card, and a credit limit, which you can use as normal. However, they hold your deposit as a security against any balance you accumulate.
- Let’s say you were to make a deposit of $200 to secure your card.
- You then accumulated a balance of $97, which you fail to pay off.
- The credit card issuer will use your $200 deposit to clear your balance.
- $103 of your deposit will then be returned to you (if you are closing the account; otherwise, it will be held on file).
The extra security for the lender means they are more comfortable offering credit lines to borrowers without a credit check, as they already have the means to clear the balance if necessary. For borrowers, secured cards are beneficial as they offer access to a credit card without a credit check of any kind; ideal if you have bad or no credit.
Ultimately, secured cards are the best way of obtaining a credit card and building a decent credit history if you do not pass credit checks for standard cards.
Below, we’ll delve into the best-secured credit cards– so you can peruse the options, and make the decision that makes the most sense for you and your financial history. So, let’s dive right on in…
OpenSky Secured Visa Credit Card
If you are unbanked (i.e. you don’t have a bank account, as is the case for 115 million US households), then the OpenSky card might be the best choice for you. You can make your deposit and clear your statement using one of the following options:
- Wire transfer
- Check
- Money order
- Debit card (if you do have access to a bank account)
What Is The APR?
18.39% variable. While this isn’t too bad for a secured credit card, it’s still rather high. Ideally, you want to ensure that you pay your balance off in full every month, or you could find yourself being swamped by interest– particularly if you have a low credit limit.
Is There An Annual Fee?
Yes, $35. This will be deducted from your balance, so it’s not an amount you have to pay directly, but you will then need to clear the balance to avoid accruing interest.
Do They Perform A Credit Check?
No. The OpenSky card is one of the easiest secured credit cards to obtain, so you don’t need to worry about passing a credit check. If you’re looking for a good way to build your credit, then this card is ideal. Not only is there no credit check to obtain the card, but you also don’t have to have a credit score search recorded on your credit file. As searches alone can impact your credit score, this is of huge benefit.
What Is The Deposit?
The minimum deposit is $200. The more you deposit, the higher your credit limit will be.
Are There Any Additional Benefits?
- OpenSky report their accounts to all three major credit bureaus, so you can improve your credit score by using this card sensibly.
- OpenSky also provide credit and financial management tips to their customers.
Read more: ‘Unbiased Open Sky Secured Credit Card Review’ »
Primor Secured Visa Credit Card
What Is The APR?
13.99%.
The APR on this card is one of its standout benefits; it’s astonishingly low for a secured credit card and competitive with standard credit cards. While it’s usually best not to carry a balance on a secured credit, if you do need to do so, then the Primor card is one of the best options.
Is There An Annual Fee?
Yes, $39 per annum.
Read more: ‘Unbiased Primor Secured Credit Card Review’ »
Do They Perform A Credit Check?
No, so you don’t have to be concerned about a record of a search on your credit file, and you can definitely obtain a card.
What Is The Deposit?
The minimum deposit is $200, and you can deposit as much as $5000. Your credit limit will be the same as your initial deposit, so if you deposit more, you’ll have a larger credit line.
Are There Any Additional Benefits?
- Reports to all three credit bureaus, so you can build your credit and build a history.
At The Present Time…
… these are the only two cards available that have no credit check.
It is important to be wary of other cards that can dupe you into a credit check. They may invite you to “check if you’re eligible for a card” without a credit check. That sounds fine, and there’s nothing inherently wrong with going through an eligibility check — but you will likely have to pass a full credit check if you want to go ahead and order a card.
If you’re considering one of these cards, then you might have a few questions. Let’s explore the most common questions people have about secured cards, so you can be sure you know exactly what you might be signing up to.
What Are The Advantages Of Secured Credit Cards?
In the vast majority of cases, you will be able to obtain a credit card without a credit check. So your previous financial history is of no concern; if you are able to make the deposit, then you will be able to obtain a card. This card will work exactly as a standard credit card would.
You will also be able to build your credit history and potentially improve your credit score, with a secured card.
What Are The Disadvantages of Secured Credit Cards?
The APR on secured credit cards is often high. If you’re going to use one, then it’s imperative you try to clear your balance in full every month.
What Will My Credit Limit Be?
Your credit limit will be for the amount that you deposit. For example, if you deposit $1,000, then your credit line will be for $1,000.
How Is That Different To A Debit Card?
You’re not actually using your deposit money when you make a payment. Here’s an example:
- You deposit $1,000.
- You are then granted a $1,000 credit limit.
- At this point in time, you hold a source of funding with the company, for $1,000. You also have your deposit, making an additional $2,000.
- In essence, you have $2,000 held by the card company.
- You make a purchase for $900.
- This is applied to your credit line.
- You now have $100 of available of credit.
- You also still have your $1,000 deposit held with the company.
When you manage this credit line successfully, it helps to build a history with credit bureaus and can ultimately improve your credit score. Your card will operate like a normal credit card, with the deposit just there as security.
Can I Use My Deposit To Pay My Minimum Payment Or Balance?
No. These are two separate financial records that you hold with the company. You can’t decide to turn to your deposit amount so that you can pay your minimum payment or balance; these payments must be made separately.
If you are late with a payment, then your card issuer may decide to use some of your deposit to meet the payments. You will usually be notified if this is going to happen; you may also find the card is voided until you can repay the security deposit.
If you’re experiencing issues paying your monthly payments, then contact the card issuer. They will be able to provide extra insight and guidance towards a solution.
What Happens If I Don’t Make A Payment?
As mentioned above, if you don’t make a payment to your credit line when required, your card issuer may use some of your deposit balance to cover the amount.
However, it is vital you don’t find yourself needing to rely on this. It may be tempting to skip a payment, thinking that the issue will be dealt with by your deposit, but this is not the case. You may find that your credit score — the very thing that you are trying to improve — is impacted by your missed payment.
If you decide to open a secured credit card, then you should take the issue seriously. See the endeavor as an attempt to rebuild your credit and improve your financial situations in the future.
Should I Get A Secured Credit Card?
This decision can only ever be a personal one, but here’s an idea of the kind of person that will benefit from a secured credit card that doesn’t require credit checks:
- You have a poor credit score and would likely fail an application for a standard credit card.
- Alternatively, you have a poor credit score and don’t want a standard credit card, as you fear this may encourage you to amass debts you cannot afford.
- You want access to the benefits of a credit card without having to go through a credit check.
- You are confident that you are going to be able to make all repayments to your card.
- You are planning to set up a direct debit to ensure you don’t miss any payments; this is by far the safest choice.
- You want to improve your credit for the future.
If these circumstances apply to you, then a secured credit card — without a credit check — could be exactly what your finances need.