If you’re interested in personal finance you’ve probably read several if not a dozen different articles promoting secured credit cards for people with tarnished credit reports or poor credit scores and are unable to get conventional credit cards. While this is true it’s not the whole truth. The “nothing but the truth” is that secured credit cards can be great for young people that are trying to establish a credit history or for foreign citizens that are living in the US and have no American credit history let alone a credit score.
If you have poor credit
Have you checked your credit score recently? You can get it free from any of the three credit reporting bureaus or from sites such as CreditKarma.com or CreditSesame.com. This will not be your true FICO® score as the only place you can get it is on the site www.myfico.com. You will have to sign up for its Score Watch program that costs $4.95 for the first month and then $14.95 a month thereafter. But you will get two FICO Credit Scores, two Equifax Credit Reports™, FICO® Score monitoring and alerts
The reason why it’s best to get your true FICO score is because that’s the one that 90% of all lenders use in deciding whether or not to grant you credit. FICO scores range from a low of 300 to a high of 850. When you check your score if you find it’s below 580 potential lenders will see you as having a “poor” credit score. If this is the case getting a secured credit card could be a good way to build up your credit so that you will have a higher credit score. And you want to have a higher credit score because there is an inverse relationship at work here. The higher your credit score, the lower the interest rates you will be charged. Conversely, the lower your credit score, the higher will be your interest rates.
How secured credit cards work
To get a secured credit card requires that you make a refundable security deposit that then works as cash collateral in the event you default on your payments. Your credit limit will be based, of course, on how much money you deposit. While it’s possible to get a credit limit of more than 100% of your security deposit it’s more often 50% to 100%. What this means is that if you make a $300 deposit on the card that’s its credit limit. However, if your lender offers only 50% of your deposit then your credit limit would be $150. Clearly this is not as good a deal. It would be much better to find a card where your credit limit is equal to your deposit.
If you’re trying to build credit
No matter what your circumstances might be, it’s a good idea to get a secured card if you are trying to build or rebuild your credit. You are basically guaranteed to get approved because you’re the one that’s taking the financial risk through your security deposit and not your bank or lender.
No one will know
One really good thing about a secured credit card is that no one but you will know it’s a secured card. They are not emblazoned with the word “secured” on them. If you pull out the card on a date or to pay for a business lunch no one around you will know that you have no or bad credit and had to get a secured card.
Choosing the right one
Virtually all banks, major lenders and even credit unions offer secured cards. Before you choose one be sure to read the fine print carefully. This is where you’ll find the card’s fees and APR as well as other important information. But there is one thing to check out that’s more important than any other. Make sure that how you use the card will be reported to all three credit bureaus – Experian, Equifax and TransUnion. You need to make sure your use of the card will be reported to all of these bureaus because not all lenders pull information from all three. You want to create a positive history with a secured card and then make sure it’s relayed to a potential lender regardless of which credit bureau it uses.
What else to look for
Maybe this goes without saying but you should look for the secured card that has the lowest possible fee structure and APR (annual percentage rate). Unfortunately, many secured cards have transaction fees for each purchase, application fees, monthly fees to maintain the card, higher interest rates. no grace period when you make purchases and other fees that unsecured cards just don’t have.
The interest rate
Unfortunately the interest rate on a secured card or its annual percentage rate can be as low as 9.90% or as high as 22.99% or even higher. When the secured card has low or no upfront fees, it often has a higher interest rate. Conversely if the card has high upfront fees or annual fees, it could have a lower interest rate. In addition, there are often many other fees that are determined by the lender and so differ from card to card.
A secured card is not a prepaid card
It’s also important to understand that a secured card is not a prepaid card. When you make a deposit to “secure” a card and make a purchase, your balance is not reduced. Of course, you will still be required to pay for whatever you charge on a secured card each month just as is the case with a conventional credit card. However, the secured deposit balance will remain the same until you close your account – unless the card’s terms state otherwise. In comparison, with a prepaid card your balance decreases every time you make a purchase until you reach a zero balance. At that time you will need to either add money to the card or throw it away.
Note: If you’d like to know more about prepaid credit cards and what they’re good for, watch this video courtesy of National Debt Relief.
They aren’t negotiable
If you search carefully you may be able to find a secured card that has few or no fees. However, some cards can have a lot of fees and they can be very high. With secured cards these fees are rarely negotiable and some have fees of more than $14.95 a month in addition to application fees, late fees, over-the-limit fees, cash advance fees, annual fees and more.
You won’t get any rewards
Another downside of secured cards is that they don’t come with any rewards. You won’t get those nice little extras that many regular cards provide such as airline miles or cash back. But remember the reason that you would get one of these cards is not for its rewards. It’s to help you build or rebuild your credit, which could serve you well in the years ahead.
The bottom line of a secured card is that it could help you build or rebuild your credit but it can be a slow process. For people that just had a bankruptcy or just completed debt settlement and don’t have good credit, it can be a good to get a secured card to help rebuild their credit scores. But if you don’t have a lot of negative information on your credit report such as late or missed payments or debts that have gone to collection then adding a secured credit card won’t turn things around for you as if my magic. The fact is that a secured card just won’t be an instant fix.