10 questions before getting a secured credit card
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. Responsible use of a credit card builds a good credit rating, too, marking the owner 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.
10 questions to ask about secured credit cards:
- What is a secured credit card?
- Where can I get a secured credit card?
- What kind of charges will there be?
- How much money do I have to deposit?
- Do all banks offer secured credit cards?
- Are there any problems to watch out for?
- Does the issuer report to all three major credit bureaus?
- How long does it take to qualify for an unsecured card?
- Will your deposit earn interest?
- How can I make the best use of a secured card to build my credit rating?
If you're in that boat, here are the answers to the top 10 questions about secured credit cards.
1. What is a secured credit card?
A secured card requires a cash collateral deposit that becomes the credit line for that account. For example, if you put $500 in the account, you can charge up to $500. You may be able to add to the deposit to add more credit, or sometimes a bank will reward you for good payment and add to your credit line without requesting additional deposits.
2. Where can I get a secured credit card?
Check Bankrate.com's list of secured credit card issuers. If you're a credit union member, ask about a secured card there. Many credit unions offer secured cards to their members and may offer lower interest rates and waive annual fees.
3. What kind of charges will there be?
This is where it pays to shop around. Look for a card that doesn't charge an application fee. Most secured cards charge an annual fee, and they vary dramatically. Read the fine print. Some people have gotten secured cards and found their entire limit consumed with fees before they ever used the card.
4. How much money do I have to deposit?
Again, the amount will vary by the card. Most allow minimum deposits of $300 or $500. Your credit limit will either be the amount of your deposit or some percentage above that amount.
5. Do all banks offer secured credit cards?
No. Linda Sherry, director of national priorities at Consumer Action, says her organization is seeing a trend in banking away from secured cards and toward unsecured cards with lower limits and higher interest rates and fees. Still, secured cards are a good choice -- and sometimes the only option -- for people who are just starting out or rebuilding after a major life event, such as a divorce, job loss or serious illness. In addition, some issuers only give secured cards to people who are new to credit -- not those who have already had one crack and blown it.
6. Are there any problems to watch out for?
Yes. Howard Dvorkin, chairman of Debt.com, calls secured credit cards "a Clint Eastwood movie -- the good, the bad and the ugly. Some are good. They have low fees and treat customers as customers instead of as cattle. The bad ones take advantage and extort the clients because of their situations. Then there's the ugly, which are completely despicable. They'll give you the card, but you have to buy this insurance policy for $55 a month."
The Consumer Financial Protection Bureau has taken several enforcement actions against credit card issuers for deceptive marketing practices of add-on products over the past few years, though secured cards, specifically, have yet to be a focal point.
You should gather plenty of information when you apply for a card. In addition, pay attention to such important items as interest rates, fees and the required deposit.
7. Does the issuer report to all three major credit bureaus?
The reason for having a secured card goes far beyond being able to buy things online. It's a vehicle for building a good credit history. If the issuer doesn't report, you've lost a major benefit. (Tip: If you start getting mailers offering you unsecured cards after you've made several months of payments on time, you'll know that the bank is reporting.) Ask if the issuer will flag the report to the credit bureaus as a secured card. Consumer Action points out that such a flag could be a deterrent to rebuilding credit.
8. How long does it take to qualify for an unsecured card?
The card issuer should want to keep you as a customer, so most will qualify you for an unsecured card after a period of making all your payments on time. The average is about a year.
9. Will your deposit earn interest?
Most issuers do not pay interest on a customer’s security deposit, though a few do offer rewards on spending. Also, find out how long the money has to stay on deposit after the account is closed. Some banks will want to keep the deposit for a couple of billing cycles to cover any stray charges that arrive.
10. How can I make the best use of a secured card to build my credit rating?
Buy a few things and pay off the card every month. "People should not get these cards to carry any balance," Sherry says. While secured cards make sure you never spend more money than you can afford, it's not a good idea to keep one any longer than you have to, experts say.
Secured cards have annual fees and higher interest rates than regular, unsecured cards. If you have enough discipline to use a secured card responsibly, you have enough to use an unsecured card and set up a better savings program on your own.
"We recommend to people that it should be a stepping stone," Sherry says.