Expert Advice: Why You Might Need to Try a Secured Credit Card

With high prices, high interest rates, and rising credit card delinquencies, many Americans might need help improving their credit scores. If your credit score is not high enough to get approved for the credit cards and loans you want, if you have gone through a bankruptcy, or if you need to repair your credit (or build credit history for the first time), you might want to try a secured credit card.

Getting a secured credit card doesn't have to feel like a step backward in your financial life -- it can be a big step forward to get back on track. We talked with Rick Conyers, Assistant Vice President of Credit Card Products at Navy Federal Credit Union, about why secured credit cards can be a good deal for anyone who's trying to improve their credit.

Let's look at why secured credit cards can be a smart move for your personal finances.

How secured credit cards work

Secured credit cards work differently than typical credit cards. The usual credit cards are also known in the banking industry as "unsecured credit cards," because the debt is "unsecured" -- based only on your promise to repay. That's why credit card interest rate APRs are so high -- the bank has no "security" on the debt it issues to you; unlike a mortgage or an auto loan, which are "secured" by collateral (a home, a car).

Instead of giving you an unsecured line of credit, a secured credit card requires you to make a cash security deposit upfront. And that amount of cash then becomes the limit for how much you can spend with the card. You don't need a lot of money to get a secured credit card. Some secured credit cards might let you open an account with a low security deposit of as little as $200.

Secured credit cards can give you rewards

The biggest benefit of a secured credit card is that it helps you build credit and improve your credit score. Secured credit cards can ultimately help you save thousands of dollars on future interest costs, by getting your credit back to where you want it to be. But secured credit cards also offer rewards points, just like some of the best credit cards.

"Some secured cards, like Navy Federal's nRewards® Secured card, allow you to earn rewards for the purchases you make just like normal rewards cards," Rick Conyers said. "If you're working to build up your credit, you might as well get rewarded while doing it!"

Navy Federal's nRewards Secured Credit Card pays rewards of 1 point per $1 spent (1%) on net purchases. And you can redeem your Navy Federal nRewards for cash back statement credits, merchandise, or gift cards. For example, 2,500 points would get you $25 of cash back.

Some other secured credit cards that offer rewards include:

• Discover it® Secured Credit Card: 1%-2% cash back
• Bank of America® Customized Cash Rewards Secured credit card: 1%-3% cash back
• Capital One Quicksilver Secured Cash Rewards Credit Card: 1.5%-5% cash back

Keep in mind that to join Navy Federal Credit Union, you or someone in your immediate family must be a member of the military, or a military retiree or veteran. If you're not eligible for Navy Federal, you can choose from the other best secured credit cards.

How to "graduate" from a secured credit card

Don't assume that you're stuck with the limitations of a secured credit card forever. The best secured credit cards will let you upgrade, or "graduate," to a regular unsecured credit card if you can build up a good track record of making payments on time and otherwise make responsible use of your secured credit card.

"By using your card responsibly, you'll prove to the issuer that you understand how to handle credit," said Conyers. "Some issuers will automatically upgrade you to a non-secured card if you continue to practice strong financial habits."

After just three months of using the Navy Federal nRewards® Secured Credit Card, if you qualify, you could get an automatic increase in your credit line (without increasing your cash deposit). And after six months, Navy Federal Credit Union will start reviewing your account to see if you qualify for an upgrade to a regular unsecured credit card.

Bottom line

Whether you choose Navy Federal's secured credit card or some of the other best secured credit cards, it might take less time than you think to get your credit back on track and qualify for a better credit card. Even if your FICO® Score is too low to get the best credit cards with the highest-value rewards points, don't worry. You can use secured credit cards to rebuild your credit and get your financial life back to where you want.