credit cards

Using a credit card to establish good credit

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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