Secured Credit Cards Can Help Build Credit

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.



Finding Secured Credit
Secured cards may sound like a perfect solution but, according to research from the Chicago-based marketing research firm Mintel Comperemedia, you may have to hunt for them yourself.

“Anyone can get a secured card if they put up the cash,” says Stephen Clifford, vice president of financial services for Mintel.  “But the companies that issue secured cards have cut back drastically on the volume of solicitations that they’re mailing.”

If you’re in the market for a new card but you don’t want to take a chance on an unsecured model, here are some things to look for when you’re choosing a secured card.

1. Interest rates. Even though the APR for secured cards is comparable to those offered on unsecured cards, it still makes sense to shop around.

If you go for a  Secured Visa Card issued through Wells Fargo (Stock Quote: WFC) you can expect a 17.99% APR on all of your purchases. But a Secured Visa Credit Card issued though Bank of America (Stock Quote: BAC) carries a 14.25% APR. Even better, the Citi (Stock Quote: C) Secured MasterCard has a 13.24% APR.

These rates aren’t written in stone, either. The issuers reserve the right to change the interest rates on purchases or on other services such as cash advances.

There are a number of secured card websites online.  However, if time is an issue you can got to BankRate.com or check out the secured cards listed on CreditCards.com

2. Fees. Credit cards are required by law to tell you about any and all fees related to their cards including those levied for transfers, cash advances and overdrafts in addition to their nominal annual fee. Secured cards are no different. 

You can find many secured credit cards listed on CreditCardRatings.com. Once you’re on a card issuer’s site, look for the “terms and conditions” link to see what fees you can expect. 

3. The bank’s rights. Your secured card may be backed by a hefty deposit but, if you don’t pay your monthly bill, your lender may just take your money.

Although credit cards will usually claim that you’ve defaulted if you haven’t paid your balance in 90 days, according to Arnold, it’s a good idea to find out what your lender can and cannot do with your account in the event of non-payment.

The rules set forth by a lender can vary but you can find information about the bank’s obligations (and your rights) by reading the terms and conditions for each card and searching for sections with names such as “Security Interest, Pledge, Assignment of Collateral” or “Security Agreement.” 

4. Watch out for fakers. Not all credit cards are fair or even legal. If you want to make sure that a perspective lender is legitimate, you can find out more about them by contacting the Better Business Bureau in your area or look for the the lender on the Federal Trade Commission’s list of registered banks.

—For the best rates on loans, bank accounts and credit cards, enter your ZIP code at BankingMyWay.com.

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