Secured Credit Cards

A basic step to rebuild  or build your credit

If you’ve had difficulties with credit in the past, you may be finding it difficult to reestablish your credit as lending practices tighten. Don’t worry. There is a tried and true option that you shouldn’t overlook: the secured credit card.  A secured card simply requires you to deposit funds into an account with the lender. In turn, the lender makes an amount of credit available to you through a credit card.  The required deposit may range from a few hundred dollars to several thousand dollars, depending on the amount of credit you want to have available, but the benefits of reestablishing your credit make that amount a small price to pay. 

Deposits

The deposit you’ll be required to make is the lender’s security against any default in payment.  The deposit decreases the lender’s risk, because payment is virtually guaranteed. If you do fall behind on your payments, the lender can keep the deposit, which typically serves as the credit limit on the account (see below). The policies on deposit seizure vary from one institution to the next. Some creditors may take the deposit only in cases of severe delinquency, generally five to six months of late or missed payments, while other lenders seize the deposit if you miss a single payment. Another variable to consider is whether the deposit will earn interest. Some lenders allow interest to accrue on a deposit, while others don’t. Make a point of asking about interest if you’re considering a secured card.

Credit Limit

The credit limit on a secured card account can range anywhere from 50% to 100% of the amount you initially deposit, but many lenders will raise the amount of your limit as you continue to make your monthly payments on time. Some lenders actually allow for a credit limit greater than your deposit. For example, if your credit limit is set at 150% of your deposit, if you deposited $500, your credit limit would be $750. 

Lending is a risk-based business; the greater the risk, the higher the interest rate a consumer will be charged.  Most people who opt for a secured card do so because they have no credit history or their credit report shows that they’ve had difficulty managing their credit in the recent past. The interest rates they’ve been offered on traditional cards and loans are astronomical, because they represent a higher degree of risk to potential lenders. One of the pleasant surprises of secured credit cards is that they typically don’t carry high rates, because there’s little risk that the lender won’t be paid. If you’re in the market for a secured card, shop around for the lowest rates and approach lenders who have the most reasonable terms. A good resource for locating and comparing secured credit cards is www.bankrate.com.

Like traditional credit cards, secured cards have costs associated with their use. Application fees, processing fees, and annual fees aren’t uncommon, so it’s important that you understand the potential costs that come with the card.  Hundreds of secured credit card products are priced fairly, but an equal number aren’t, so you’ll have to do some research. Avoid cards with high fees, especially if a substantial amount of the deposit will be used to satisfy such fees.  For instance, one particular secured card requires a $200 deposit.  Consumers receive a $200 credit limit but have access to only $25 when they receive their card because of a one-time $175 “activation” fee.        

The Federal Trade Commission issues warnings about unscrupulous companies looking to take advantage of unsophisticated or vulnerable consumers.  One such scam identified by the agency involves ads that lead borrowers to believe that they’ll receive a credit card simply by calling a 900 number. Unwitting callers are then billed outrageous amounts, in some cases as much as $50, just for making the call.  Many of these organizations require that consumers place several additional calls to complete their application process.  In the end, consumers never receive a card and are left paying hundreds of dollars in telephone service fees.   

Just like their more traditional counterparts, lenders that offer secured credit cards strive to build relationships with low-risk candidates. As a result, some institutions will allow its customers to convert to an unsecured credit card after the company has received a number of timely payments from the customer. 

Lenders understand the challenges that people may face from time to time, and they’ve created secured credit cards as a positive step on the path back to credit worthiness.  Using secured credit in combination with a commitment to reestablishing a positive payment history can help you build a stronger financial future.