Secured Credit Cards

Who should consider a secured credit card?Someone who has no credit history.Someone with a damaged credit history.What is a secured credit card?Secured cards are credit cards opened with a deposit into a savings account, money market or certificate of deposit. The amount of deposit required varies from card to card, but generally minimum amounts range from $250 - $500. These funds are considered your security and will even earn a little interest since they are being held in a savings account. Your credit limit is determined by the amount you deposit into the savings account. Sometimes the limit will be for the full amount of the deposit; other times it will be a percentage of the total.It is important to keep in mind that a secured card is a credit card, not a debit card. If full payments are not made each month, then interest is charged on the outstanding balance. And the lending institution uses the security money to pay off the debt only as a last resort. Even though the card is secured, it is still possible to damage credit.What are the benefits of a secured credit card?Establishing credit. If you have never had a credit card, a good first step in establishing good credit is applying for a secured credit card. Assistant Professor of Economics at Austin Peay State University in Clarksville, TN, Jerry Plummer says, “A secured card is most useful for the person starting out on their credit history, since it says that the person is willing to take the extra step to establish credit.”Reestablishing credit. If your credit history is damaged, you may only be able to qualify for a secured credit card. Using this secured card appropriately and within the set parameters will help rebuild your credit and qualify you for an unsecured card. If you have had to file for bankruptcy, however, you may not qualify until it has been discharged.Preset limit cannot be exceeded. If poor spending habits were part of the cause for bad credit, then a secured credit card will help keep spending in check.Useful for transactions that require a credit card. Hotels and car rentals require the use of a credit card. If you don’t qualify for an unsecured card but you do for a secured card, then you are still able to make the transaction.What should I look for or avoid when shopping for a secured credit card?Fees. This is the area you will really want to research when shopping for a secured credit card. Some cards will come with fees that run into the hundreds of dollars, eating away much of the credit you secured with the savings account. Professor Plummer says a card with no fee is the best, but a small one-time fee can be okay. Annual fees for attractive secured cards typically range from $20-$35. Be sure to watch out for hidden fees such as “registration charges” and “setup fees.”Interest Rate. Just because you have no or poor credit doesn’t mean you have to settle for the highest interest rate. Interest rates for attractive secured cards should not exceed 19%. Shop around and get the most competitive rate available.