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Secured Credit Cards
What is a Secured Credit Card?
Secured credit cards are credit cards that require a deposit to be put down against the credit limit. Dependent on the card the credit limit will either be a percentage of this deposit, or the same as the deposit. This deposit will be placed in an untouched high interest account and will be returned in full, upon cancellation of the card (assuming you don’t default on your payments).
It's difficult today to get by without a credit card. If you want to stay in a hotel, rent anything, or even buy food on the ferry, you are out of luck if all you have is a debit card. Secured credit cards function in the same way as a regular credit card, so you receive a monthly bill, have a credit limit, and are subject to the same fees and penalties as on a regular card. However, they represent a much lower risk to the provider so you can be approved with bad credit.
Pros and Cons
- You can be approved with bad credit, and as long as you manage the card responsibly, secured credit cards are an excellent way to start rebuilding a damaged credit score.
- Most secured credit cards report to a credit bureau, which is important if you are trying to rebuild your credit score. Prepaid credit cards often do not, so while they give some of the benefits of the secured credit cards they do not help with your score.
- Even if you get into trouble with your card, you won’t be sent to collections because the provider can settle your account using your deposit.
- The security deposit for a secured credit card must be paid upfront. This means you must have $500 or $1000 at your disposal before you can get one. Possibly you will have to do a few months of saving before you can apply.
- Most secured credit cards have high interest rates, which represent the risk of default. Paying off your bill in full every month is a good way to avoid allowing this characteristic to negatively affect you.
- They often also have many more fees than traditional cards, including fees for application, processing and an annual fee for just having the card.
What to Consider When Choosing
- Fees – all secured cards will have fees, but some are much higher than others. Read the terms and conditions before you sign anything
- Minimum Deposit – some cards require the deposit to match the credit limit, others require only a percentage, shop around to find which works best for you.
- Credit limit – What will you be using your card for? If you want to rent a car a $200 limit won’t be enough. If you just want to build credit by paying your phone bill every month then it will.
- APR – Generally interest rates on secured credit cards are higher than traditional cards. However there are some predatory companies out there so shop around and be aware. Paying your full bill within the grace period will also help you avoid interest.
- Is the provider a reputable bank? - There are plenty of predatory companies out there looking to prey on people with few options. A reputable bank will likely give you a fair deal.
- Will the provider be reporting to the credit bureaus? –If you are trying to build your credit reporting is necessary. A non-reporting card won’t help you at all.
- Can your card be converted to an unsecured credit card?- Some cards convert to unsecured and return your deposit after a specified term of good payments. This is a nice feature, but ultimately not necessary if you find a card that matches your other needs more closely.
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