Baby-step your way to credit with a secured card

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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 be able to add to 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. lists secured credit card offers from banks around the country.

Read the fine print
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.

Be sure to check that a secured card issuer reports to the three major credit bureaus before applying for any card. The reason for having a secured card is to build a good credit history. If the issuer doesn’t report, you’ve lost a major benefit. Some of the smaller issuers may not, which is why it’s a good idea to get a secured card from a major, reputable bank.

Ask if the issuer will flag the report to the credit bureaus as a secured card. Consumer Action, a nonprofit advocacy and education organization based in San Francisco, points out that such a flag could be a deterrent to rebuilding credit.

If you start getting mailers offering you unsecured cards after you’ve made several months of on-time payments, you’ll know that the bank is reporting.

Also, ask 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.

Not everyone qualifies for secured cards
Getting a secured card is not as easy as it sounds, however. Card companies have different requirements for applicants. All banks accept those with no credit history or no information on file with a major credit bureau.

Some will accept people who have had a bankruptcy as recently as six months to one year before they apply. However, most require that a court has discharged the bankruptcy. And still others will not consider people with a past bankruptcy.

Build your credit rating
Remember, you’re using a secured card to build up a strong payment history, not to go into debt. So stick to smaller purchases that you can pay off each month. And always pay on time. This will build a strong credit rating. Once you’ve done that, move on.

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.

Taking off the credit training wheels
After a year of on-time payments with a secured card, you may qualify for an unsecured credit card with a lower interest rate. Shop carefully.

You’ve worked way too hard to establish a good payment record. Don’t sell yourself short by signing on for the first costly offer that comes your way. Be a smart shopper.

This credit card search engine from will help you compare offers from issuers around the country.

Don’t overlook offers from local banks and credit unions; the deal you’re looking for may be from a lender just around the corner.

And you won’t need a lot of cards to build credit. One or two low-limit cards are more than enough.

— Updated: April 13, 2006