If you have bad or nonexistent credit, secured credit cards are a great, accessible alternative to traditional credit cards to start building your creditworthiness. Secured credit cards operate similarly, but the main difference is that you need to pay a security deposit as collateral to get one.
Because secured cards are meant for people with subprime credit, you may be surprised if your application gets denied. After all, you had to pay an upfront deposit. While this situation is rare, it can happen if you do not meet the lender’s standards, such as insufficient income or inability to pay your bills.
But, do not give up or panic. Here’s everything you need to know to find out why you got denied and alternative options to consider as you build your credit up.
- While secured credit cards are typically for people with poor credit, there is a possibility that your card issuer will deny your application.
- If your application is not approved, there are several steps you can take to understand what happened and how you can build credit to prove your creditworthiness.
How Does a Secured Credit Card Work?
A secured card operates like a regular credit card with one caveat you need to pay money upfront to apply. This deposit then serves as collateral for how much your line of credit will be. It is not a prepayment for the card. If you default, the bank uses this as protection by keeping your deposit to repay your debt.
Typically, your credit limit will be equivalent to how much you deposit. For example, if a secured credit card has a $500 minimum deposit and you make the minimum deposit, your credit line is $500. Before you get a secured credit card, make sure the bank reports regularly to the three major credit bureaus Equifax, Experian, and TransUnion.
One of the biggest hurdles people need to overcome to get a secured credit card is the security deposit. Typically, the minimum requirement by the credit card issuer is roughly $200, but you will need to deposit more money if you want a higher credit line.
But, sometimes, even if you have the money for the deposit, the lender, or card issuer, can deny your application if your credit profile is too risky. For example, if you have a history of late or missing payments or you recently filed bankruptcy, you may need to keep building credit to qualify.
Since this is a credit card, you will receive a monthly statement with your charges and be required to make minimum monthly payments on time. The goal is to rebuild or establish good credit, so you must pay all your bills on time. That means only charging what you can afford to your card. We recommend paying off your balance in full every month to avoid high-interest debt.
Graduating From a Secured Card
Once you have demonstrated that you can manage credit responsibly, your bank might eventually return your security deposit and upgrade you to an unsecured credit card. After 24-36 months of on-time payments, you may become eligible for the upgrade.
Reasons Why You Might Get Denied for a Secured Credit Card
Different credit card issuers may have varying criteria for approval. Often, they want validation that borrowers can repay their debt. Below is a list of common reasons why your application may get turned down:
Negative data on your credit report: When creditors review your application, the first thing they look at is your credit report, which shows your credit history and helps creditors figure out if you are trustworthy. If you are currently going through bankruptcy or have a history of missing credit card payments, repossessions, or delinquent credit accounts, you might not qualify for a secured card. Alternatively, if there is a mistake on your reports, such as a mix-up with another person with the same name or serious delinquency erroneously reported, a denial could occur.
Insufficient or unverified income: Lenders are required to verify your ability to repay your debts. So, if you do not meet their income requirements or cannot provide documentation to verify your income, your application might not get approved. Additionally, if you are under 21, you or a cosigner will need to demonstrate that you have enough income to pay your bills.
Lack of funds to pay the security deposit: To open a secured credit card account, you typically need a bank account to fund the deposit and have enough money to cover the required amount. If you do not have a bank account or enough cash, you will likely need to wait until you have an account with the minimum deposit requirement.
Low credit score or poor credit history: Even though secured credit cards are for people with bad credit, some credit issuers will still require minimum credit scores to approve your application. If you have no credit history, you may need to build your credit up first.
Exhibiting bad habits on existing accounts: Credits may look at how you manage your existing accounts with them to verify your creditworthiness. If you consistently overdraft your account or have accounts in default or delinquency, that will negatively impact your application.
Transitioning jobs: Sometimes, credit card issuers will want to see that you have a stable income, not just enough money. If you recently started at a new company, this can adversely affect your application.
What to Do if You Get Denied for a Secured Credit Card
If you get denied credit or loans, there are several steps you can take to improve your approval odds the next time you apply.
Figure Out Why
If a lender denied a secured credit card application, you are legally entitled to know why. They should have sent you an adverse action notice in the mail that lists the reason(s) why your application got denied. This letter should give you a good idea of why, but if it doesn’t, ask so you can address the issue.
If you got denied because of your credit score, the letter should include your score, the date the data got pulled, and the method used to get the data. If there was a mistake on your credit report, consider disputing the error with one of the three bureaus. If you lack creditworthiness, the letter should give you steps to build your credit. It is also possible that you filled out the application wrong or did not meet the age requirement.
Turn to Your Bank or Credit Union
If you have a checking account, it may be easier to turn to your bank for a secured credit card since you already have a relationship with them. If not, check in with a local credit union. Since they are nonprofit organizations, they usually have more flexible approval requirements and consumer-friendly financial accounts available.
Check Your Credit Report
You are entitled to a free credit report from each of the three bureaus on AnnualCreditReport.com if you received an adverse action notice. When reviewing your credit report, ensure all the information is accurate and there is no fraudulent data. If you find any errors, initiate a dispute immediately.
If you have a lot of late or missed payments, set up auto-pay for recurring bills or use an app like Mint to track your bills. While this credit-building method is time-consuming, it is a crucial part of your credit score that needs to get addressed.
If you have unresolved collection issues, make sure to either dispute them or ask the collection for a debt validation letter. If the debt is valid and unpaid, work with the creditor to map out a payment plan or speak to a lawyer to provide legal advice.
If you filed bankruptcy before, depending on what type of bankruptcy you filed, that could stay on your credit history for 7-10 years, which means you may have to wait out this time before you are no longer considered high risk.
Request Help From Someone You Trust
Sometimes, credit card issues will allow you to apply with a cosigner. Your cosigner will essentially vouch for you and use their creditworthiness to back you up. If you have someone you trust who has a good credit history, ask them to cosign for you.
However, understand that when your account has a cosigner, they are equally responsible for repaying your debt. If you default or fail to pay bills on time, that will adversely impact them.
The Bottom Line
Rejection does not feel good but know that you have options when your application for a secured card gets denied. Work on ways to build credit, such as making on-time payments, requesting a free copy of your credit report to verify the info, and getting verified income. As you improve your credit history, you can unlock access to more financial products in the future, such as 0% APR cards or cashback credit cards.