Secured Credit Cards
Secured credit cards aren't only for people with a tarnished credit report or poor credit score that prevents them from being approved for traditional credit cards. They're also are a good way for young people and students to establish credit – and can also help internationals living in the U.S. who have no American credit history.
Secured cards require a refundable security deposit from the cardholder, which functions as cash collateral in case he or she defaults on payments. The cardholders' credit limit is based on how much money they deposit.
Sometimes you can get a credit limit of more than 100% of the security deposit, but more often it's 50% to 100%. If you can only afford to put $300 toward the deposit, that may be the credit limit on that card. If the lender offers only 50% of your deposit, you would have a $150 credit limit.
No matter the circumstances, if you are trying to build your credit then it's a good idea to get a secured card, says Lauralynn Schueckler, online marketing specialist for Advantage Credit Counseling Service, a nonprofit credit counseling agency. You are pretty much guaranteed to get approval because you are the one taking on the financial risk through your security deposit, and not the lender.
Don't worry the world will know you're carrying a secured card. These credit cards don't have "secured" imprinted on their front. Using one on a date or business lunch won't broadcast to everyone around you that you have no – or bad – credit.
Finding The Right Card
There are dozens of secured credit card options. Almost all major lenders, banks, and credit unions offer a secured card, says Schueckler.
Focus on the fine print, Schueckler. That's where you'll find the card's APR (annual percentage rate), fees and additional information.
The most important thing to research is if the secured card reports to the credit bureaus because otherwise all of your efforts will be in vain, she says. Ideally, the card should report to all three bureaus – Equifax, Experian and TransUnion – because not all lenders and banks pull information from each credit-reporting agency. You want any positive history with a secured card to be relayed to a potential lender no matter which bureau it consults.
Next, look for a secured card with the lowest possible rate and fee structure. The terms are likely to be far less favorable than for other types of cards.
Many secured cards have application fees, transaction fees for each purchase, monthly fees to maintain the card, higher annual fees, higher interest rates, no grace period for purchases and other fees that unsecured cards simply do not have, says Stephen Lesavich, Ph.D., an attorney and co-author of The Plastic Effect: How Urban Legends Influence the Use and Misuse of Credit Cards.
Other things to look for include:
- Will the secured card allow an increase in your credit limit with responsible use and for what fee?
- Will the secured card issuer allow you to graduate to an unsecured card with responsible use and for what fee?
- Will the secured card provide interest on the deposit, points, miles, etc.?
Don't mistake a secured card for a prepaid card. Unlike a prepaid credit card, the deposit you make to secure a secured credit card is not diminished when you use the card. You still have to pay what you charge on a secured card each month. The secured deposit balance remains untouched until you close your account, unless otherwise stated in the card's terms.
Watch the interest rate. A secured card's interest rate or annual percentage rate (APR) can start at 9.90% and surge to 22.99% or higher. If a secured card has zero or low upfront fees, then it may have a higher interest rate, says Schueckler. However, if a secured card has higher upfront fees for application and/or annual fees, it might offer a lower interest rate.
There are also typically many fees determined by the lender that differ by card.
Fees aren't negotiable. Some secured cards have few to no fees, while others can have high fees and a lot of them. Schueckler says that credit history – or lack of it – doesn't factor into the fee structure. When it comes to secured cards, fees are rarely negotiable and some secured cards have monthly fees that top $14.95/month in addition to application fees, annual fees, late fees, over-the-limit fees, cash advance fees and more.
Don't expect cash back, airline miles or other rewards. Secured cards don't typically offer the extras that many regular credit cards provide.
The Bottom Line
Secured cards can help people build – or rebuild – their credit. That's often a slow process, Schueckler cautions.
If you've gone through a bankruptcy or just finished with debt settlement and your credit is not the best, then it's a smart idea to apply for a secured card to help you rebuild your credit rating, she says. However, if you have a ton of derogatory information on your credit report (lots of late and missed payments), adding a secured credit card won't magically turn things around for you. A secured card isn't an instant fix, says Schueckler.