You can't make it through life without a credit card because many businesses require credit cards, even if have enough cash to cover the purchase. Hotels, car rentals, and airlines are just a few of the places that credit cards are required.
If you’ve never had credit or have a poor credit history, it might be difficult to get approved for a regular credit card. In these situations, a secured credit card might be the only way to start or improve your credit standing.
Secured credit cards are viable alternatives to regular credit cards, but before you get one, there are some questions you answer about the card.
What are the fees?
Like many regular credit cards, secured credit cards have fees. Some of the most common fees include application fees, processing fees, and annual fees. Use the credit card terms and conditions to uncover any fees for the secured credit card before applying. Stay away from cards with high fees that use most of your security deposit.
How much is the security deposit?Secured credit cards are “secured” with a deposit that's kept in a savings account and used only when you default on your payments. Most secured credit cards have minimum and maximum deposit limits. Find out if your deposit will earn interest and if so, how much.
In what situations is your deposit used?Some creditors only use the deposit in cases of severe delinquency, e.g. 5-6 months past due. Others use it for a single late payment. Knowing the situations that the creditor will draw from your deposit can help you be more disciplined, especially if you’re concerned about getting your full deposit back.
Are there eligibility requirements?Income and age restrictions might apply to some secured credit cards. Even though you’re willing to put down a deposit for a credit limit, card companies still have requirements in place. Many secured credit card lenders require borrowers to have a checking or savings account with their bank before extending secured credit.
What will your credit limit be?
Your credit limit
isn’t always the exact amount as your deposit. It can be some percentage of your deposit, making your credit limit less than the deposit.
What is 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.
Are timely payments reported to credit bureaus?
If you want the credit card to help establish or re-establish credit, your payments must be reported to the major credit bureaus
. Secured credit cards that don’t report to bureaus won’t help your credit rating. Make sure the card isn’t reported in a way that reveals it as being a secured card to prevent bias from future lenders.
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. Unsecured cards often have lower fees (or no fees at all), a lower interest rate, and fewer restrictions.