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No credit? Secure some yourself

by Richard Barrington

There are certain Catch-22 situations in life:

  • It takes money to make money
  • You can't get a job to gain experience unless you already have experience
  • You can't get a credit card unless you've already established good credit

Secured credit cards can help you with the last situation. If you're a young person trying to establish a credit history, or if you've had some financial misfortune and need to repair that history, a secured credit card could be just the ticket.

However, since secured credit cards are geared towards people who are either inexperienced or somewhat desperate for help, they can also be among the worst credit card deals out there. So, it is essential for you to know the difference between good and bad secured credit card offers.

What is a secured credit card?

A secured credit card works just like a regular credit card, with one crucial difference. As with an unsecured credit card, you can use the secured card to make purchases up to your available credit limit, and you will be charged interest against those purchases if you don't pay your balance in full every month. However, the kicker is that a secured credit card requires you to provide up-front collateral - a substantial deposit of money - with the credit card issuer.

Often, this deposit will equal your credit limit on the card. This is why it is called a secured card - the issuer has cash security against your potential debts.

If secured credit cards require a deposit, why wouldn't you simply use a debit card, and make charges directly against a checking account balance? The answer, plain and simple, is that debit cards won't establish - or re-establish - credit history. Secured credit cards will.

Key elements of secured credit card offers

Some of the features to look for when you review secured credit card offers include the following:

  • Required deposit amount
  • Credit limit
  • Application or set-up fee
  • Monthly or annual fees
  • Interest rate charged on your credit card debt
  • Interest rate paid on your deposit

Another key element is credit agency reporting. Since the idea is to establish a positive credit history, you will want to make sure that the card issuer reports to the three major credit rating agencies (TransUnion, Experian and Equifax), and preferably does not distinguish between secured and unsecured cards in its reporting.

Making a secured credit card work for you

A secured credit card can work out well if you:

  • Make all minimum payments on time. After all, the idea here is to establish a positive credit history.
  • Avoid carrying a balance. Your deposit with the credit card company may be earning interest, but in the range of typical savings account rates, which are typically much lower than the interest rates charged. So, even though you may have more on deposit with the credit card company than you owe, you could be paying out a lot more than you gain in interest if you let even a small debt balance carry over.
  • Use it as a stepping stone to a regular credit card. Secured credit card terms may be better than nothing, but they are not ideal. Once you have used a secured credit card successfully for a while, it's best to move to a regular unsecured credit card. With an improved credit history, you will be able to browse credit card deals for the offer that is best for you.

What to watch out for with secured credit cards

The big thing to watch out for with secured credit cards is excessive fees. Some secured credit cards charge a one-time setup fee, but you should be able to avoid this if you shop around. Then there are the monthly and/or annual fees. Make sure you carefully identify all fees you will be paying before you sign up for a card.

With some smart comparison shopping, you should be able to find a secured credit card that should cost you under $20 a year. Given the relatively low credit lines available on secured credit cards - often, as little as $250 to $500 - this still represents a sizable percentage of the money available to you, so make sure you don't pay any more than that.

Choosing your credit card application wisely

Since some secured credit cards charge a fee just to get started, you will want to do your homework carefully before sending in any credit card applications. Besides, if you are trying to establish a positive credit history, you want to minimize the number of applications you've got out there.

A secured credit card can be a useful tool, but the best secured credit card is one you use only as a means to move on to another credit card with the privileges available to those with a more solid credit history, such as a balance transfer credit card or a cash back credit card.

Published 06/15/11 (Modified 06/26/14)


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