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A Look at Secured Credit Cards

By manybanking.com Staff
Most credit cards are unsecured. Credit card issuers extend credit in return for the promise that it will be paid back with interest. They do so because your credit history shows that you are a reliable borrower. But, what if it doesn’t?

Those who have negative credit histories or no credit histories have a hard time obtaining unsecured credit. Without the opportunity to use credit wisely, however, they would have no way to improve their credit history. That’s where the secured credit card comes in. A secured credit card allows those with bad credit or no credit to improve their credit ratings over time by using the card responsibly. Additionally, a secure credit card makes it possible for those with bad credit or no credit to make hotel and plane reservations, rent cars and complete other transactions that require a credit card.

A secured credit card presents minimal risk for a lender because it is backed by a cash deposit. In most cases there is a 1:1 ratio of cash deposit to credit line. For example, if you deposit $300 onto a card, then $300 is available in credit. Some cards may fund less than the deposit and others may offer slightly more credit than the deposit covers. With some secured credit cards, users can add more money to the deposit to increase the credit limit. Most secured credit cards have a maximum balance of $5,000 however. 

Not all secured credit cards are created equal. Fees, interest rates and other terms can vary greatly. Compare secured credit cards at manybanking.com.  All secured credit cards will charge an annual fee, but this fee should only be around $50 - $60. Some cards charge exorbitant fees like processing fees and application fees that use up a substantial portion of the deposit immediately. These cards should be avoided.

Secured credit cards are available at a wide range of interest rates. For example, the Applied Bank® Secured Visa® Credit Card has a fixed regular APR of 9.99% while the New Millennium Secured Platinum Visa® or MasterCard® has a fixed regular APR of 19.50%. Most secured credit cards have no grace period, so finance charges begin accruing as soon as a transaction is completed. Lower APR cards will cost less even if you don’t carry a balance.

Make sure a secured credit card reports to all three credit bureaus. If it does not, it will not help improve your credit. Additionally, the issuer should not report that the card is secured to the credit bureaus. This too would not help build good credit. The credit bureau reporting policy should be disclosed before you apply for a secured credit card.

The best way to use a secure credit card is to pay off the balance in full each month. This shows credit bureaus that you can handle paying bills responsibly. If you begin to receive offers for unsecured credit cards, that is an indication that your credit report is improving. Most secured credit card issuers will qualify you for an unsecured card after having a secured card (and making timely payments) for about a year. Once you qualify for an unsecured credit card, you can cancel the secured card. Fees and rates on secured cards make them poor long-term credit vehicles.

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