Secured Credit Cards

Consumers who are trying to build — or rebuild — their credit history may want to consider a secured credit card.

Secured credit cards are typically used by those who cannot qualify for a regular (unsecured) credit card. They require a cash deposit at the time of application, which ensures that the debt will be paid. The deposit may be returned when the account is closed with a balance of zero, if the user meets all of the bank’s requirements.

The deposit amount, as well as the applicant’s credit history, will determine the card’s credit limit. The cards can be used like any other credit card.

Banks will consider an applicant’s age and may choose to issue cards only to existing account holders. You should be ready for various fees — application fee, start-up fee, annual fee and monthly interest.

A secured credit card will allow you access to hotels and rental cars, which often require a credit card. It also will allow you to practice good spending habits and begin to build — or rebuild — your credit score. If you make your payments on time, you can look forward to a higher credit limit, and one day you’ll qualify for an unsecured credit card.

Build Good Habits with Secured Credit Cards

Low credit scores can entrap users by preventing them from getting new credit card accounts, which prevents users from building up their credit scores. That’s where secured credit cards come in.

When looking for a secured credit card, begin by finding out your credit score. Federal law provides for one free credit report each year, from each of the three credit bureaus. Do some research to learn which benefits are provided for someone with your score. Talk to your bank, if you have one. Your score and the amount of money you can make as a deposit will determine which cards you qualify for.

A security deposit can range from $200 to $10,000. At the beginning, your credit limit typically is equal to or lower than your deposit. You can raise your credit limit by adding to the deposit down the road.

Secured cards generally have a lower credit limit than regular credit cards, which prevents users from taking on more debt and doing more damage to their credit scores. Even if your credit limit is initially low, you can build good habits by making smaller purchases and paying them off. Experts recommend using only 30 to 50 percent of the credit available in your account.

In order to show major credit card companies your ability to properly use credit, you will want to make your monthly payments on time. This activity on your account should be reported to the credit bureaus, and your credit score should start to rise.

Be certain to read the offer information on a secured credit card to ensure that they are reporting your activity to all three credit bureaus. It is important to make sure that the information is accurate and that banks are reporting your positive account activity (“good standing”) in a timely fashion.

Your credit limit can be raised after keeping the account in good standing for six months or more, depending on the bank.

Some cards report good standing even when purchases are not made on the account. By keeping the these cards at a zero balance, you can build your score without any hassle. Some banks will even offer interest on your security deposit.

Pay on Time with Secured Credit Cards

Just as practicing good habits with a secured credit card has benefits, returning to bad spending habits with a secured credit card has consequences.

Payments must be on time. Interest will be charged on balances kept in the account. Fees may be added for late payments or if minimum payments are not made. (Reading the fine print in the application will prevent you from finding out about a penalty later.)

The security deposit stays in the account while it is open, so you’ll want to plan ahead so you can make the monthly payments on anything you buy. The inability to pay your monthly bill may result in losing the deposit and possibly the account.

After using a secured card properly for a set time period — generally six to 18 months — you may be eligible for an unsecured credit card. If your secured credit card balance is zero, then you may get your full security deposit back — and possibly a new line of credit from the creditor. Sometimes banks will keep a portion of your account secured and not return the cash deposit right away, but just raise the credit limit.

One option is to apply for an unsecured credit card, but keep your secured credit card open to continue benefiting from having an account in good standing. However, if the monthly fees and membership fees are burdensome, it may be unwise to keep the secured account open.

With your improved credit score, you will one day find yourself eligible for a car, business or home loan.

Al Krulick

Al is an award-winning journalist with dozens of years of writing experience. He served as a drama critic, high school teacher, arts administrator, theatrical producer and director. He also dabbled in politics, running twice for a seat on the U.S. House of Representatives for Florida. Al is a Certified Debt Specialist with the International Association of Professional Debt Arbitrators and specializes in real estate, credit and bankruptcy advice.

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