What Should You Know About Secured Credit Cards?
A Consumer’s Guide to Establishing a Solid Credit Rating.
Are hoping to get your hands on your very first credit card?
Does your credit rating happen to be less than stellar?
Well then a secured credit card might be your golden opportunity for establishing, or re-establishing, a squeaky clean credit rating. A secured credit card may be your only credit option if you have filed for bankruptcy in the past, or if your poor spending habits ruined your hopes for ever getting a regular credit card, personal line of credit or a loan.
Now let’s keep in mind that a secured cards work fairly similarly to non-secured or regular credit cards; however there are differences. For instance, secure credit cards require a deposit, made by the card holder to the lender, before the card is issued. The deposit varies from card to card, but generally $250 to $500 is required. This deposit is considered the “security” part of the agreement, and this deposit is held in a savings account.
Keep in mind that secured credit cards are not a debit cards. Even though your credit limit is determined by a percentage of your total deposit, or in some cases the full amount, you are still expected to make full payments on the balance of your credit card at the end of each month. Interest will be charged on the outstanding balance, just like on a regular credit card. However with a secured credit card, in situations where you’re unable to pay off the balance remaining, the lending institution will use your security deposit to pay off your debt. To get a handle on your credit card jargon please consult our article entitled The Ultimate Guide to Credit Card Lingo.
Who should consider a secured credit card?
- A person with zero credit history – This might be your only option if you’ve never had a credit card or a loan, in order to establish a good credit rating.
- An individual with poor credit history - If you use your secured card responsibly you will be able to re-establish your credit history. Note: If you filed for bankruptcy, the likelihood of qualifying for a secured credit card before the bankruptcy has been discharged is very low. If you need a credit card immediately, a prepaid credit card from institutions like MasterCard or Western Union is your best option. These work just like pre-paid phone cards - you put money on the card and the funds deteriorate as you spend them, just like the minutes on your pre-paid phone. With a pre-paid credit card you can’t incur a balance from month to month. This is why prepaid cards don’t help re-establish a bad credit rating.
Where do I apply for a secure credit card?
Most companies don’t offer secured cards outright, so you’ll have to do some digging before you find an institution that issues them. Once you do, setting up a secure credit card is fairly simple. It works like this:
- A lender agrees to issue you a secure credit card in exchange for a pre-determined security deposit from you.
- The lender puts your security deposit into a savings account (so you will gain some interest on it).
- The lender then issues a secure credit card so you can charge purchases.
- The security deposit now acts as a credit history for the card holder, and the card holder can use it to book hotels or make purchases online, just as they would with any other credit card.
The important thing to remember with secured credit cards is that your lender has the power to cancel the card if you don’t abide by your agreement. For example, secure credit card lenders typically ask that you pay off your credit card balance at the end of each month. If an outstanding balance remains on your credit card - you are charged interest. If you still don’t pay off the balance on your credit card, the lender will use the security deposit in your savings account to pay off your debt. Your deposit acts as a safety net, so if you default payment on your secure credit card, the lender will use the security deposit to bail you out. However if you continue to default on your pre-arrangement, the lender will cancel the card and you will do more damage to your already poor credit rating.
Things you should know before applying for a secure credit card:
It’s easy to set up a secure credit card, and there are a slew of lenders that will offer to help you out. However the Federal Trade Commission (FTC), a watch dog agency that educates and alerts consumers to deceptive marketing practices, advises buyers to approach any type of financial arrangement with the following information in mind:
- Seek out secure credit services from reputable banks – look for secure credit cards offered by big names like Experian, Equifax, WesternUnion and TransUnion.
- Beware of to-good-to-be-true offers - No lender can guarantee a credit card before even looking at your credit history. If they do – go elsewhere for your plastic.
- 1-900-GET-A-CREDIT-CARD - Beware of any lender that advertises a 1-900 number to call for your card. Remember you pay for 1-900 calls – and you know what kind of reputation they have.
- Credit fixes – these so-called legitimate companies offer to make your bad credit rating disappear for a pretty outrageous fee. Sounds good doesn’t it? But did you know that you can correct many credit mistakes and outdated information on your credit report simply by contacting the credit bureau on your own accord.
- Beware of hidden fees – For instance activation fees, set up charges or registration fees. Lenders typically require a small one-time activation fee that can range from $25 to $60, but it doesn’t hurt to ask if you can get a no-fee credit card. Now no fee secure cards are hard to negotiate, but if it’s available you may just save $25 to $60 dollars right off the bat!
- Annual fees – The more reputable secure credit providers - Experian, TransUnion and Equifax - will charge a $20 to $35 annual fee.
- Interest rate - With a secured credit card you will have to pay a higher than average interest rate, however, if it’s above 19% - keep looking!
- Expect penalties – you better bet you’ll be charged a penalty for every late payment you make on your secured credit card. That’s why it’s important to be mindful of your balance and when your payments are due.
Moving past your bad credit history
Only time and good charging practices will mend your bad credit rating, so don’t expect to see an improvement before 6 months time. If you start to receive mail from credit companies offering you unsecured credit cards - your credit rating is improving! However if you’ve been irresponsible with your credit cards in the past, a secured credit card will give you the time and safety net to adopt healthy charging habits before you risk it on a MasterCard, Visa or American Express credit card.
Regardless of your situation – perfect credit, no credit or bad credit - the best way to build and maintain a good credit rating is to work out a budget and stick to it. So just because you get the good credit go-ahead from your lender, you can still request to have a portion of the credit available to you secured for your own peace of mind. There’s no rush! Once your good credit is re-established, your credit score will increase and you will be eligible for all of the loans, personal lines of credit and credit cards that you want.
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