It's tough to get by without a credit card.
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.
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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 my deposit earn interest?
- How can I make the best use of a secured card to build my credit rating?
If you need to build credit, 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 extend your 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. Avoid any card that wants you to pay an application fee. Most secured cards do charge an annual fee, and they vary dramatically. Read the fine print. Some people have gotten secured cards and have seen their entire deposit (and credit limit) eaten up by 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 give secured cards only to people who are new to credit -- not those who have already had one crack and blew 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 deceptively marketing 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.