Secured cards are credit cards opened with a deposit into a savings account, money market or certificate of deposit. The amount of deposit required varies from card to card, but generally minimum amounts range from $250 – $500. These funds are considered your security and will even earn a little interest since they are being held in a savings account. Your credit limit is determined by the amount you deposit into the savings account. Sometimes the limit will be for the full amount of the deposit; other times it will be a percentage of the total.
It is important to keep in mind that a secured card is a credit card, not a debit card. If full payments are not made each month, then interest is charged on the outstanding balance. And the lending institution uses the security money to pay off the debt only as a last resort. Even though the card is secured, it is still possible to damage credit.
What are the benefits of a secured credit card?
Establishing credit. If you have never had a credit card, a good first step in establishing good credit is applying for a secured credit card. Assistant Professor of Economics at Austin Peay State University in Clarksville, TN, Jerry Plummer says, “A secured card is most useful for the person starting out on their credit history, since it says that the person is willing to take the extra step to establish credit.”
Reestablishing credit. If your credit history is damaged, you may only be able to qualify for a secured credit card. Using this secured card appropriately and within the set parameters will help rebuild your credit and qualify you for an unsecured card. If you have had to file for bankruptcy, however, you may not qualify until it has been discharged.
Preset limit cannot be exceeded. If poor spending habits were part of the cause for bad credit, then a secured credit card will help keep spending in check.
Useful for transactions that require a credit card. Hotels and car rentals require the use of a credit card. If you don’t qualify for an unsecured card but you do for a secured card, then you are still able to make the transaction.
What should I look for or avoid when shopping for a secured credit card?
Fees. This is the area you will really want to research when shopping for a secured credit card. Some cards will come with fees that run into the hundreds of dollars, eating away much of the credit you secured with the savings account. Professor Plummer says a card with no fee is the best, but a small one-time fee can be okay. Annual fees for attractive secured cards typically range from $20-$35. Be sure to watch out for hidden fees such as “registration charges” and “setup fees.”
Interest Rate. Just because you have no or poor credit doesn’t mean you have to settle for the highest interest rate. Interest rates for attractive secured cards should not exceed 19%. Shop around and get the most competitive rate available.
Read the fine print. Linda Tucker, Director of Education for Consumer Credit Counseling Service for Arkansas and Memphis, TN, stresses the importance of reading the fine print. Doing so will let you know your exact obligations to the issuing company: for example, the grace period, what happens if you don’t make a full payment, and what fees are attached if you don’t make the full payment. Understanding these details will help make sure you are not further damaging your credit.
Fraudulent Offers. As with unsecured cards you need to watch out for fraudulent offers.The Federal Trade Commission gives the following advice to protect yourself from credit card fraud:
- Offers of easy credit. No one can guarantee to get you credit. Before deciding whether to give you a credit card, legitimate credit providers examine your credit report.
- A call to a ’900′ number for a credit card. You pay for calls with a ’900′ prefix — and you may never receive a credit card.
- Credit cards offered by “credit repair” companies or “credit clinics.” These businesses also may offer to clean up your credit history for a fee. However, you can correct genuine mistakes or outdated information yourself by contacting credit bureaus directly. Remember that only time and good credit habits will restore your credit worthiness.
It can take several months to see an improvement in your credit history. Bankrate says it’s a good indicator when you start receiving flyers in the mail for unsecured cards that your credit is improving. However, it’s a good idea to continue taking things slowly. Using a secured card will help you learn healthy habits so that when you do get an unsecured credit card you remain in control of your spending and credit.
Most companies don’t advertise secured cards. But you can visit the card reports section of http://www.creditcardinternational.com to find out where and how to apply. Click on the link entitled “Cards for Consumers with Poor or No Credit”.