Secured credit cards are a great option for those who are looking to establish credit or needing to rebuild their credit history. If you've never carried a credit card before but would like to start somewhere, the cards on our list below may be worth considering. You'll need to put down a deposit as collateral in order to establish your credit line. If you wish to obtain more credit, the card issuer may allow you to add to your deposit or may simply extend you additional credit over time.
Having bad credit is kind of a catch-22. You need to establish new credit in order to improve your score and yet your existing bad credit will keep you from getting a credit card in most cases. But, there is a solution. More and more individuals with poor or no credit are turning to the secured credit card arena. These cards do not require a credit check as they are backed by a security deposit you make with the credit card company and in many cases will be reported to all three major credit bureaus, allowing you to start rebuilding your credit. Here’s how it works:
So, once you own such a card, the amount of money that you keep in your newly opened account becomes your credit card limit. If you want more buying power on your credit card, you'll need to deposit more into your account. That is, your deposit serves as collateral and for all intents and purposes, represents your credit line. If you've got $400 in your account (most cards keep to a limit between $300 and $500), then you can charge up to that amount on your credit card.
This kind of card is called "secured" because the financial institution has a hold on your money before you can spend any of theirs. On the other hand, an unsecured credit card works by allowing you to spend before they ask for your money -- many times, you get to this point after you graduate from using secured cards and establishing a clean credit history. It's also at this point that many consumers go astray and forget that a credit line is not a source of free money but actual debt that needs to be paid off. So once you end up cleaning up your credit (or building it up successfully), protect it like a hawk!
One of the biggest drawbacks to using a secured credit card is the fees. A secured credit card works a lot like a regular credit card in that the card issuer makes the bulk of its profit through the use of interest rates on balances carried longer than 30 days. These interest rates are somewhat higher than those levied on unsecured credit cards that are issued to individuals with good or excellent credit. However, these rates can be avoided if you pay your balance in full every month. Also, there are set up fees and account maintenance fees to be aware of. It’s best to comparison shop card products to make sure that you find the best card for your circumstances for the least cost.
The other thing to keep in mind is that the balance on a secured credit card must be paid just like the balance on any other credit card, security deposit aside. Using your secured card responsibly and making regular, on time payments are keys to establishing a good credit history. Issues with your secured credit card can be reported negatively against your credit report if you miss payments, exceed your credit limit or default on your agreement.
Re-establishing good credit is a key factor in creating a sound and secure financial future. Borrowers that choose to obtain a secured credit card and handle their account responsibly can expect to upgrade to a regular, unsecured credit card in a matter of months.