It’s hardly news that the American consumer is in a bad way with debt. Numbers out of the New York Fed show that total U.S. consumer debt was nearly $8 trillion in the third quarter of 2024, a record high. Meanwhile, all 50 states saw their average credit scores decline in 2024.
The nationwide decline in credit scores has been accompanied by a surge in credit card defaults, with major U.S. banks reporting a concerning uptick in missed payments. In the third quarter of 2024, credit card delinquency rates at large banks reached levels not seen since 2011, signaling deep-rooted financial struggles across the country.
The crisis has left many Americans searching for ways to rebuild their creditworthiness. Amidst the turmoil, secured credit cards offer a practical solution for people who want to regain their financial footing and rebuild their credit scores.
Financially challenged Americans pay billions in junk fees
A recent study, the 2025 Cash Poor Report, reveals that Americans who are living paycheck to paycheck paid a staggering $39 billion in "junk fees" to borrow money over the past year, marking a 34% increase from 2023. This alarming statistic underscores the urgent need for more affordable borrowing options.
High fees add momentum to financial instability, making it harder for cash-strapped Americans to regain control of their finances and rebuild their credit. The report highlights that unplanned expenses cost the average American family living paycheck to paycheck $1,825 annually. With nearly half of these cash-strapped individuals having less than $200 in their checking and savings accounts, the need for accessible credit options has never been more critical.
The report also shows that financial struggles are not limited to low-income individuals. Surprisingly, one in seven cash-poor Americans earns over $75,000 annually. This statistic highlights the pervasive nature of financial instability across income brackets, reflecting how expenses often expand to meet (and exceed) income.
Secured credit cards offer a path to recovery
In this challenging financial landscape, secured credit cards are gaining traction as a viable solution for those looking to rebuild their credit. Unlike traditional credit cards, secured cards require a cash deposit that serves as collateral, reducing the risk for issuers and making them more accessible to individuals with poor or no credit history.
Usually your credit limit is tied to the amount of your deposit, so if you open a $300 secured credit card, the card issuer would request a $300 security deposit. Yet some card issuers, like Capital One, may be willing to approve you for a secured credit card that features a higher credit limit than your required deposit.
In many ways, secured credit cards work like traditional credit cards. The cards typically operate on a major credit card network—Visa, Mastercard, American Express, or Discover. And you can use the accounts to make purchases anywhere that accepts these payment methods.
Secured credit cards often feature higher interest rates than unsecured credit cards as well. However, if you don’t revolve a balance on your secured credit card, the APR on your account shouldn’t impact you. When you pay off your full statement balance every month you can avoid paying interest charges on your account. But if you carry a balance from one month to the next, the higher interest rates could cost you a great deal of money.
How does a secured credit card help you build credit?
Once you're approved for a secured card and make your deposit, you can use the card just like a regular credit card. You can make purchases, pay bills, and manage your day-to-day expenses. The key to building credit with a secured card lies in using it responsibly:
- Payment history: Your payment history is the most crucial factor in building credit. Make sure to pay your secured card bill on time every month. Timely payments demonstrate to creditors that you can manage credit responsibly and contribute positively to your credit score.
- Credit utilization: Another important factor is your credit utilization ratio, which is the amount of credit you're using compared to your credit limit. It's recommended to keep your credit utilization below 30%—for example, if your credit limit is $500, try to keep your balance below $150 each month.
- Credit reporting: Secured cards report your payment history and credit utilization to the major credit bureaus (Experian, TransUnion, Equifax). This reporting helps establish a positive credit history if you consistently make on-time payments and keep your balances low.
- Credit score improvement: As you use your secured card responsibly over time, you'll likely see improvements in your credit score. Building a positive credit history demonstrates to lenders that you are a reliable borrower and can lead to better credit offers in the future.
How to select a secured credit card
Before you open a secured card, it’s smart to shop around and compare your options. Some secured cards may feature lower security deposit requirements than others. You may find other secured cards with better rewards, lower APRs, other more appealing benefits than the competition has to offer.
Some secured credit cards also have other fees, which quickly add up. Rodney Williams, president and co-founder of SoLo Funds, recommends that customers read the terms and understand their late fees.
“The late fees on credit cards can accrue interest and significantly balloon the cost of the credit,” said Williams. “With more than 80% of subprime consumers paying late over time, it’s extremely important to understand the total cost of this scenario on your credit."
The tl:dr on secured credit cards
As Americans navigate a challenging financial landscape, the importance of financial literacy and access to affordable credit options cannot be overstated. Secured credit cards, with their lower barriers to entry and credit-building potential, offer a practical option for those who need to rebuild after default or those who need a leg up onto the wealth ladder.
Just remember, while secured credit cards can be a useful tool, they're not a magic wand that make other financial problems disappear. Customers must learn to use credit responsibly as part of a broader strategy to build a budget and improve their financial health. As always, consider your personal financial situation carefully before applying for any new credit product.
