If you have a low credit score, especially now, you may have a tough time getting credit, so you can't improve your score. It can seem like a terrible cycle, but don’t worry. If you need to build up your credit, you still have options.
Secured credit cards are similar to regular credit cards in that they carry comparable interest rates, annual fees and must be paid every month. However, unlike your standard-issue Visa (Stock Quote: V) or MasterCard (Stock Quote: MA), the secured card is backed by a deposit from the borrower which can range from as little as $200 to as much as $10,000.
The amount of your deposit doubles as your line of credit. That’s why the card is called “secured.” So, if you put $1,000 into a secured account with your lender and then go out and buy a 42-inch Panasonic plasma-screen television for $899.99 at your local Costco (Stock Quote: COST), you’ll only have a $100.01 credit line. Moreover, you’ll have to make at least the minimum payment on the purchase every month.
Your lender won't come after you, even if you can’t make those payments, or fall several months behind, according to Curtis Arnold, credit card expert and founder of CardRatings.com. They’ll just seize your account instead, Arnold says.
“The advantage of these cards is that if you get in over your head you’ve got that deposit as a safety net,” says Arnold. “The card makes sense for people who have had problems managing credit in the past and may have run up a lot of debt.”
According to Brett Watters, senior analyst for Mercator Advisory Group, card issuers are anticipating a conversion to pre-paid or secured credit cards as the number of people eligible for regular cards declines.
“Program managers and issuers know that there is a conversion taking place,” says Watters. “But the push right now is helping people get back on track.”
Who They're For
A secured card is a great way for consumers with damaged credit to rebuild and improve their credit scores. According to Arnold, as long at the consumer is consistent with payments, remembers to pay at least the minimum amount and doesn’t rack up more debt than they can handle, there is a possibility they could be eligible for an unsecured card in 18 to 24 months. Moreover, if a consumer continues to exercise restraint and build up a good credit history, they could qualify for car loans or even a mortgage down the road.
These cards aren’t just for adults with poor credit histories . A secured card with a small deposit can also help teens learn how to become responsible for their own credit. An added benefit is that they could also start building their own credit history without the risk of starting life in debt.