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Secured Credit Cards- Consumer Tips
Whether you have no credit or damaged credit, secured credit cards are a
good tool for building a good credit history.
Several months ago Tom, a member of
CreditBoards.com, filed for a Chapter 7 Bankruptcy. Now he is in the
process of rebuilding his credit history. It’s a task that is not easy,
but with patient persistence he is seeing progress already. Daily he
checks his credit score and is slowly seeing improvement. 1 In addition
to correcting every mistake, even the smallest ones, on his credit
report, he is using a secured credit card. 2 This secured card is an
important tool in the overall process of building or rebuilding credit.
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.
Read the fine print. Linda Tucker, Director of Education for Consumer
Credit Counseling Service for Arkansas and Memphis, TN, stresses the
importance of reading the fine print. Doing so will let you know your
exact obligations to the issuing company: for example, the grace period,
what happens if you don’t make a full payment, and what fees are
attached if you don’t make the full payment. Understanding these details
will help make sure you are not further damaging your credit.
Fraudulent Offers. As with unsecured cards you need to watch out for
fraudulent offers.The Federal Trade Commission gives the following
advice to protect yourself from credit card fraud:
·
Offers of easy credit. No one can
guarantee to get you credit. Before deciding whether to give you a
credit card, legitimate credit providers examine your credit report.
·
A call to a '900' number for a credit
card. You pay for calls with a '900' prefix -- and you may never receive
a credit card.
·
Credit cards offered by "credit repair"
companies or "credit clinics." These businesses also may offer to clean
up your credit history for a fee. However, you can correct genuine
mistakes or outdated information yourself by contacting credit bureaus
directly. Remember that only time and good credit habits will restore
your credit worthiness.
When will I qualify for an unsecured credit card?
It
can take several months to see an improvement in your credit history.
Bankrate says it’s a good indicator when you start receiving flyers in
the mail for unsecured cards that your credit is improving. However,
it’s a good idea to continue taking things slowly. Using a secured card
will help you learn healthy habits so that when you do get an unsecured
credit card you remain in control of your spending and credit.
Where can I find a secured credit card?
Most companies don’t advertise secured cards. But you can visit the Card
Reports section of http://www.CardRatings.com to find out where and how
to apply. Click on the link entitled “Cards for Consumers with Poor or
No Credit”.
Other tips
Tom
recommends sticking with only one or two cards and keeping spending to a
minimum. The goal is to pay the card off each month.
Tucker emphasizes the importance of paying the amount due each month;
otherwise late fees can be charged, interest rates raised, privileges
lost, and credit history negatively affected.
Make sure you are getting a credit card as opposed to a gas card or a
department store card.
Make sure a reputable bank or credit union, even a local one, is issuing
the card. And, don’t automatically assume a bank is issuing the card.
Not
all issuers report to the three major credit agencies (Experian,
Equifax, and TransUnion). It’s important to get a card that does report
to all three agencies; otherwise you will be wasting your time.
Fortunately, secured cards normally report to the credit agencies just
like unsecured cards (you should verify this before applying).
If
you have filed for bankruptcy, you may need to wait until it has been
discharged before qualifying for a secured card.
Get
one only if you cannot get credit, since you have no credit record; or
if you have poor credit. Plummer says, “Many companies will not even
count them as credit, such as automobile F&I (Finance and Insurance)
people, although they will not admit it.” So, if you don’t really need a
secured card, you will be doing more harm than good.
Finally, whatever situation you are in, no credit or poor credit, the
best way to build good credit is to set up a budget and then stick with
it.
1
You can pay membership fees to any one of the three credit bureaus –
Experian, TransUnion, and Equifax- to be able to check your credit score
online daily. Visit our Credit Information section for more details. Tom
recommends purchasing Microsoft Money 2004, which comes with a one-year
membership to Experian (value of $99.00).
2
To find out more about correcting errors on your credit report, read our
article How to Correct Mixed or Split Credit Reports.
This article is the property of
www.bestcreditcardsonline.com,
which has been offering credit cards services since 2002.
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