Whether you've had some credit snafus in the past or you're just starting out on your credit journey, a secured card can be a helpful tool. It's a credit card with a safety net. The safety net is the amount of money you deposit with the creditor to minimize or eliminate the creditor's risk. Yet, don't agree to a product in haste. Instead, ask yourself and the creditor some questions before getting a secured credit card.
What is the Required Deposit Amount?
The amount will vary according to the credit card issuer and the product, but most secured credit card limits are from $300 to $500, according to the Bankrate website. Choose a secured credit card with a credit limit that will allow you to use it responsibly to build credit.
How Does the Deposit Affect the Credit Line?
The deposit you make could be equal to 100 percent of the credit line. Or the card issuer could grant you a credit line up to 150 percent of the deposit. For example, if the required deposit is $300, the creditor could grant you a credit line of up to $450.
When Can I Get My Deposit Back?
After you prove yourself with the creditor by paying your bill according to the terms of your agreement, you should be able to get your deposit back. Creditors will sometimes refund your deposit if they decide to extend unsecured credit to you as a result of your responsible behavior. Ask the creditor where the deposit is held and the terms of having it refunded to you.
Where is the Best Place to get a Secured Credit Card?
Check out a resource such as the list of secured credit cards published by Bankrate. Contact your current bank and ask if it offers a secured credit card. Some national banks offer secured credit cards.
Do You Report to All Three Credit Reporting Agencies?
Ask if the secured credit card issuer reports to all three major credit reporting agencies -- TransUnion, Experian and Equifax. When trying to rebuild your credit, you want as much positive information reported to your credit file as possible. If a secured credit card issuer doesn't report to all three credit agencies, you aren't getting the most benefit for your money. Also, ask the card issuer if it will report the credit line as "secured." If so, it may not help your credit score. In addition, other lenders may not be willing to extend you unsecured credit because of the risk involved.
How Much Interest Will My Deposit Earn?
Your deposit will earn the same rate as a savings account at your bank would earn. For confirmation, ask the creditor for the specific rate of interest your deposit will earn. Don't expect to earn much on your deposit.
What Interest Rates and Fees are Attached?
Ask to see a fee schedule and the other terms of the account in writing, such as interest rates, before you apply for a secured credit card. Fees and interest should be reasonable. Compare the terms of different secured credit cards to choose the best deal. The Credit CARD of Act of 2009 prohibits secured credit card issuers from charging fees equal to more than 25 percent of your credit line during the first year you hold your account.
How Can I Best Use This Type of Credit Card?
The purpose of getting a secure credit card is to build or rebuild credit. To responsibly use the card, you should make minimal charges and pay off your entire balance within the grace period each month -- if applicable -- to avoid having to pay interest. If you charge the secured card up to its limit, make only the minimum payment each month and then charge it up to its limit again, without ever paying it off, you won't be demonstrating responsible credit behavior.
When Should I Avoid Accepting a Secured Credit Card?
Read all of the fine print before accepting a secured credit card. While many issuers of secured cards offer reasonable terms, others do not. If a credit card issuer charges many different fees in addition to interest, such as annual fees, maintenance fees and credit limit increase fees, avoid its product. There are plenty of other companies that will offer secured credit cards with reasonable fees. If you don't qualify for a reasonable secured credit card offer, wait a few months and try again.
Is There an Interest-Free Grace Period?
Ask each secured credit card company if it offers an interest-free grace period that allows you to pay off your charges each month without incurring interest. Secured credit card issuers who begin charging interest from the second you make a purchase are not the best option. Shop around to find an issuer that offers a grace period.
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