Trying to make it in today's society without a credit card is tough. Hotels, car rentals, and airlines are just a few of the places that credit cards are required. Even if you have enough cash to cover your purchase, those places still ask that you pay with a credit card. Using a debit card may suffice, but in some cases, you may have a hold on funds or have to pay a hefty security deposit. And prepaid cards are often not accepted.
Getting approved for a credit card with no credit or a poor credit history is tough. A secured credit card might be the only way to start your credit or improve your credit history.
Secured credit cards are viable alternatives to regular credit cards, the major difference is that you have to put down a deposit for your credit limit. Your security deposit is typically returned when you close your account as long as you make timely payments. Before you choose a secured credit card, make sure you get the answers to a few important questions.
What are the fees?A secured credit card may have application fees, processing fees, and annual fees. As with other credit cards, the fees for a secured credit card are disclosed in the credit card offer and the card's terms and conditions. Be sure to evaluate and understand the fees before you apply. Compare the fees on the card you're considering with the fees on other secured credit cards to get an idea of whether you're paying too much.
Don't apply for an expensive secured credit card. The goal is to build your credit up enough to qualify for an unsecured credit card. No sense in paying more than you have to.
What is the minimum security deposit?Secured credit cards are “secured” with a deposit that's kept in a savings account (sometimes an interest-bearing account) and used only when you default on your payments. There will be minimum and maximum deposit limits. A secured credit card with a low minimum requirement is easier to get; that means you won't have to come up with as much money to receive the credit card. As you're shopping around, have an idea of the deposit you're able to make and rule out the cards with minimum requirements outside your budget.
What will your credit limit be?Your credit limit may be equal to your deposit. Or, the minimum required deposit may be less than your initial credit limit. The Capital One Secured MasterCard, for example. allows qualifying applicants to pay a security deposit as low as $49 for a $200 credit limit.
What is the APR?The APR, or annual percentage rate, is the interest rate applied to balances that you carry beyond the grace period. The higher the interest rate, the higher your finance charge will be when you carry a balance.
The APR is one of the most important deciding factors with any credit card because it influences the cost of carrying a balance. Secured credit cards tend to have higher interest rates than unsecured credit cards, so don't expect to get the most competitive rate. You can avoid paying interest on your balance by paying it in full.
Are timely payments reported to credit bureaus?If you want the credit card to help establish or re-establish your credit, the credit card issuer must report to the major credit bureaus - Equifax, Experian, and TransUnion. Secured credit cards that don’t report to bureaus won’t help your credit rating. Reporting to an alternative credit reporting agency won't really benefit you because only a few lenders use these credit reports.
Can the card be converted to an unsecured credit card?The best secured credit cards allow you to convert to an unsecured after a period of timely payments, like 12 to 18 months. Unsecured cards often have lower fees (or no fees at all), a lower interest rate, and fewer restrictions. Best of all, unsecured cards don't require you a security deposit.
If the best card for you is one that doesn't convert to an unsecured credit card, it's not a huge worry. You can always apply for an unsecured credit card once you've established a history of responsible borrowing and repaying.
Is this a reputable bank?People with bad credit and no credit - the ones who typically shop for secured credit cards - are often targeted with predatory products. Some secured credit cards on the market have absurdly high interest rates and fees. Avoid applying for a card from any bank that sounds sketchy, even if the offer seems like a great deal.
More people are giving feed back and reporting scams on various internet sites. Do an internet search for the credit card you're considering to learn what others have experienced with that secured credit card and the credit card issuer.