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Secured Cards
The main advantage of a secured card (verses a typical unsecured credit card) is for building or rebuilding credit. Secured cards are typically the only choice for someone who has no credit history or with damaged credit history.
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 to $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, and 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.
The best reason for a secured card if to 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. The next best reason is to reestablish 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.
Other Advantages...
- Preset limits that cannot be exceeded. This imposed rule can help keep spending in check.
- Situations where a credit card is a must. Hotels and car rentals require the use of a credit card.
Picking a secured credit card...
Compare the fees. Some cards will come with fees that run into the hundreds of dollars, leaving the small limit with little available for use. Annual fees for attractive secured cards typically range from $20 to $35. Be sure to watch out for hidden fees such as “registration charges” and “setup fees.”
Compare the interest rate. Interest rates for attractive secured cards should not exceed 19%.
Understand the terms and conditions. Exceeding the grace period, not making the full payment and what fees are attached if you don’t make the full payment can hurt your attempts at credit establishment or repair.
Qualifying for an unsecured credit card...
It can take several months to see an improvement in your credit history. Using a secured card will help you learn healthy habits so that when you do get an unsecured credit card you continue to be proactive in managing your credit.
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