Credit cards are an absolute necessity of life in today’s modern world.
For travel they are essential. Try making a hotel or airline reservation without one! Or renting a car. You need it for ID or writing checks in supermarkets. Using your credit card wisely also builds a desirable credit rating, which results in better offers for credit or mortgage rates. “Hey, that’s great!,” you say, “but I’ve never had a credit card”, or “I’ve just gone through bankruptcy”, or “I have a poor credit history in general”. You may feel that you are up the proverbial creek without a paddle, but there is hope! A secured credit card is the best way to establish or re-establish your credit rating.
Let’s take a look at some common questions about secured cards.
What is a secured credit card and how does it work?
You’ll make a cash deposit which is used as collateral for a credit line, generally as low as $300 or as high as $5000. Basically whatever you can afford to put on deposit where you’ll earn a competitive interest rate. You’ll be issued a major credit card such as Visa or MasterCard by one of many secured card issuers out there. If you put up $300, for example, you’ll probably be issued a credit card with a credit line near that amount. As well, some banks allow you to add funds to the deposit account and increase your credit line. You will still need to make your regular payments that show on your billing statement. The deposit is used only for collateral if you don’t pay. After 6 months to 1 year, some banks will reward you for timely payments by increasing the credit line without requiring you to put in additional funds.
If you cancel your card, generally the deposit is held for 30 days or more to make sure that charges don’t come in on the next billing cycle.
Where can I find secured credit cards? Do all banks offer one?
No, not every bank offers secured cards. But many do, and your chances to obtain one are good. Just check out some of the advertisers on this site, or talk to your local credit union if you are a member. A substantial number of credit unions in the country offer secured cards to their members at reduced rates and fees.
What will a secured credit card cost me?
This is the fly in the ointment, and it pays to pay attention. Many issuers charge an application fee, some don’t. Look for those ones! Annual fees are a sad fact of life with secured cards and they vary dramatically. Look around, you’ll find low fees out there. Again, check out some of the advertisers on this site. Be careful that you don’t have to pay fee upon fee upon fee before you even start using your card. Read the fine print!
Same with interest rates; you know they are going to be high. Live with the rate, make your payments as you promised and you’ll eventually build your credit to where you’ll get unsecured offers. Do watch out for over-the-limit fees which can be excessive. The answer is to not charge over your limit and use your secured credit card responsibly.
Do issuers of secured credit cards report to credit bureaus?
Most do, and this is the main reason for obtaining a secured credit card. Sure, being able to travel and buy things online is important, but building your credit rating by having your payment history reported to the credit bureaus is, as they say, priceless. You’ll know they are reporting when you start getting offers for other types of credit. To help rebuild credit, buy a few things each month and pay off the card. Don’t carry a large balance near your credit limit. In fact, try to not carry any balance at all, just make your charges and pay them off monthly. Activity is good. Showing that you buy and pay responsibly goes a long way when a potential unsecured source of credit pulls your bureau report and examines it. Poor payment history and large balances impact your FICO score as well which is fed by credit bureau information.
Do I need to be careful when looking for secured credit cards?
YES! Many people looking for credit are desperate because of their situations and are easily taken advantage of by banks and credit card issuers. Fees can be excessive, add on ‘requirements’ like insurance can be ridiculously expensive and are sometimes forced on people as a monthly charge just to keep the secured card. While all have exorbitant interest rates, some issuers have low fees and treat customers well, while others just see an opportunity for extortion of people in unfortunate situations.
Keep your eyes open, pay attention, and READ THE FINE PRINT!
