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Credit cards are a fact of life. You need one to
make a hotel or plane reservation, or to rent a car, even if you
plan to pay cash. Many stores require a credit card to accept your
check. Responsible use of a credit card builds a good credit rating,
too, marking the consumer as mortgage-worthy.
But people who have never had credit or need to repair
a poor credit history may not qualify for a regular credit card.
For them, a secured credit card may be the only way to establish,
or re-establish, credit.
If you're in that boat, here are the answers to your
top questions about secured
credit cards.
What is a secured credit card?
A secured card is a credit card established by depositing money
into an account. The account serves as security for the card; if the
bill isn't paid, the money in the account may be used to cover that
debt. For example, if you put $500 in the account you can charge up
to $500. You may also be able to increase the deposit to add more
credit, or sometimes a bank will reward you for good payments and
add to your credit line without requesting additional deposits.
The amount you have to deposit will vary by the card.
The typical minimum is $300 to $500, but you can find issuers that
require $250 or less. Your credit limit will either be the amount
of your deposit or some percentage above that amount.
Your deposit options include a savings account, money
market or certificate of deposit. Generally the interest rate you'll
earn on your deposit is what you'd get by opening a savings account
at your own bank, but not always.
A valuable steppingstone, not a bargain
The interest rates and fees on secured cards tend to be lower
than those charged on unsecured credit cards targeted toward people
with poor or no credit.
Even so, secured cards are hardly bargains. Interest
rates in the high teens or higher are typical, and so are annual
fees. Because annual fees vary dramatically from offer to offer,
it's best to shop around. Bankrate.com lists secured
credit card offers from banks around the country.
Avoid application fees:
Every secured-card issuer charges an annual fee. But, avoid cards
with processing or application fees. Some people have gotten a secured
card only to find their entire deposit consumed with fees before
ever using the card.
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