A secured credit card is a type of credit card that requires you to make a deposit to secure the card’s credit limit. The deposit is held as collateral for any unpaid balance on the credit card. A secured credit card is like a non-secured credit card in all other ways. You swipe it to make charges and then pay the balance when the billing statement comes.
Who Needs a Secured Credit Card?
You might need a secured credit card if you can’t get approved for a traditional credit card. This could be you if you’ve never had a credit card or if you have bad credit. A secured credit card is a good option because it gives you the chance to start building or rebuilding your credit history.
How to Choose a Secured Credit Card
When you’re looking at secured credit cards, you have to choose one the same way you’d choose any other credit card.
What are the fees?
It’s common for secured credit cards to come with additional fees. An application fee and an annual fee are the most typically types of fees. Look at several different secured credit cards and compare the fees between them. If there’s a credit card that has high fees compared to the others, stay away from it. You want as much of your security deposit to go toward your credit limit as possible.
How much of your deposit goes toward your credit limit?
Ideally, you want 100% of your deposit to go toward your credit limit. That means you get a $500 credit limit if you make a $500 deposit. Some credit cards give you as little as 50% of your deposit in available credit. Make sure you know upfront whether you’ll receive your full credit limit or something lower. It’s also worth asking whether your credit limit will increase as you make timely payments on your credit card balance.
How high is the interest rate?
The interest rate is an important factor for any credit card. It determines how much interest you pay when you carry a balance beyond the grace period. You won’t receive the most competitive interest rate on secured credit cards because there’s a certain level of risk associated with borrowers who have bad or no credit history. Still, your interest rate should be comparable to that of other secured credit cards.
Does the credit card issuer report to the credit bureaus?
The secured credit card is pointless if your card issuer doesn’t report your payment history to the credit bureaus. Before you accept a secured credit card confirm that the card will be included on your credit report. Also make sure the account entry won’t reveal that the card is a secured credit card.
Can the card be converted to a non-secured credit card?
Your card issuer may convert your credit card to a non-secured account after a certain number of timely payments. Anywhere between 12 to 24 months is typical for a credit card to be converted, if the card issuer has that service. Otherwise, you can try to apply for a non-secured credit card at another bank after 1-2 years of positive payment history.
Building or Rebuilding Your Credit With a Secured Credit Card
Think of a secured credit card as an opportunity to build a good credit score. Don’t think any less of it because you had to pay a deposit and certainly don’t let that affect your spending habits.
Use your secured credit card to make small purchases each month. Keep your purchases below 20% of your credit limit to show that you’re not taking on more credit card debt than you can handle. Charging only a small amount of your available credit will help build a good credit score.
Pay your balance in full at the end of the month. Not only does this keep you from accumulating more debt than you can repay, it also ensures your payments are on time each month. Your payment history has the most significant impact on your credit score, so take extra steps to make sure your payments reach your creditor on time.
Treat your secured credit card just like a regular credit card. Forget that you made a deposit against the credit limit. Otherwise, you can use that to justify missing your credit card payments. Not only will that hurt your chances at a good credit score, it also means you miss out on some or all of your security deposit. Think of the deposit as money you have in a savings account because ultimately you want to get the money back.
Secured Credit Card Scams
The Federal Trade Commission warns of secured credit card scams that only try to get money from you. Some of these scams convince you to call a 900 number to receive the card. Your phone bill will include a charge for the call and you won’t receive a credit card. A sure sign of a scam is a promise or guarantee or approval or an offer to repair your credit.
To avoid a scam, apply for a secured credit card from a reputable bank. Your bank is a good place to start.
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