Secured Credit Cards

Do you have a poor credit history, or maybe no credit history at all?  If so, you know how hard it is to be approved for a credit card. Financial institutions usually extend credit cards to individuals with established credit and a record of using credit responsibly.  There are, however, legitimate credit options available for someone who is new to credit or is trying to re-establish credit.

One viable option is a “secured” credit card – a credit card backed by money you deposit as collateral with the card-issuing financial institution.  This collateral, or security deposit, usually mirrors the credit limit of your secured credit card.  For example, John Smith deposits $1,000 into a money market or savings account or a certificate of deposit at XYZ Bank.  In return, XYZ Bank issues Mr. Smith a credit card with a credit limit of $1,000.  The $1,000 security deposit enables XYZ Bank to extend credit to Mr. Smith without exposing the company to potential losses if he is irresponsible with his credit charges or defaults on his debt.  If that occurs, XYZ Bank offsets the security deposit against the past-due amount under the terms of the secured credit card account. 

Who can benefit from a secured credit card?

  • Individuals recovering from bankruptcy or who may need to rebuild their credit
  • Someone who has never had a credit account

Which secured credit card is for you?

Even though a secured credit card is usually a temporary tool to use to build credit, carefully review the different characteristics of secured credit cards before selecting the card best for you.

  • Security deposit – The deposit amount required varies by issuer, but it is usually in the range of $300 to $500.  Remember, your credit limit is generally equal to your deposit, or it might be some percentage above your deposit.  As you prove you can manage your credit from month to month, the issuer may reward you by increasing your credit limit without requiring an additional deposit.   Check to see if you will earn interest on your security deposit, but understand that the general practice of issuers is not to pay interest.  Although you cannot use or withdraw any funds from the security deposit while your account is open, the deposit should be refunded to you in full after you close your credit card account if there is no outstanding balance.  Ask how long the issuer will hold your deposit after your credit account is closed in order to protect the company from stray charges that arrive late.
  • Fees – Examine each fee associated with the card.
    • Application fee – While some issuers charge an application fee, many institutions such as credit unions don’t charge or will waive the application fee.
    • Annual fee – Most secured credit cards charge an annual fee.  The fees vary dramatically from issuer to issuer, and fees may be tied to your credit score.
    • Monthly fee – Some issuers charge you a monthly fee for the privilege of having a secured credit card, even if you do not use it.  Avoid this fee if possible.
    • Processing fees – Determine whether fees are charged for each transaction.  Again, avoid this fee if possible.
    • Cash advance/ ATM access/ returned payment fees – These fees are behavior-driven and can be avoided by responsible credit behavior. 
  • Interest Rate – As with any other credit card, you will be charged interest on an outstanding balance that goes unpaid after the grace period has expired.  The rates can vary greatly, so shop around for the most competitive interest rate.  
  • Grace period – Most issuers, but not all, offer a 25-day, interest-free grace period.  This grace period is the number of days that you have to pay your bill before interest begins to accrue on the outstanding balance.  If you allow an unpaid balance to carry over to the next month, you lose the “grace period” and you will be charged interest on your existing balance and on every purchase from the time each charge is posted.
  • Other “Gotcha’s” – Make sure the credit card agreement does not require any other expenditure from you, such as set-up fees or the purchase of an insurance policy.
  • Credit reporting – It is imperative that you select a secured credit card that reports your activity to the big credit bureaus (Experian, TransUnion and Equifax.)  If the issuer does not report your account activity as a “revolving line of credit,” you are not getting the main benefit of the secured credit card.  

Read carefully the fine print of the credit card agreement so that you are aware of all terms, including billing procedures, fees, rates and costs.  Do the math to calculate the fees you must pay; the last thing you want is to receive a credit card and find that you cannot afford the fees.  Since credit card agreements can be difficult to understand, the Consumer Financial Protection Bureau offers a simplified sample agreement for comparison.  

Secured credit cards are offered by banks, credit unions and other third-party lenders, and the secured credit card terms differ per lending institution.   Often the best rates are found on cards issued by credit unions.  Bankrate.com offers an up-to-date list of secured credit cards that are preferred by consumers across the country.

How do you establish good credit with a secured credit card?

  • Make your monthly payments in full and on time.  This is crucial in establishing good credit.
    • Don’t be late on your payments, miss payments or default on your debt.  35% of your credit score is based upon your payment history.
    • Don’t pay just the minimum amount allowed on your account each month; pay your entire balance off each month.  30% of your credit score is based on the amount owing on your accounts.
  • Spend wisely.  Purchase only those items that you can pay off in full by the due date.
  • Be patient; it will take 12 to 24 months of careful use of a secured credit card before you will be able to open a regular unsecured credit card.  You will know your credit score is improving when you begin to get unsolicited fliers in the mail for regular credit cards.;

Watch out for scams!

As you shop for secured credit cards, you may receive offers that seem too good to be true.  Be wary!  Avoid fraudulent offers that:

  • Fail to disclose in the initial agreement the required deposit or fees you might be charged.  A reputable secured credit card will have a deposit, and most include fees.
  • “Guarantee” approval or easy credit.  This type of advertisement should be a red flag.  There is no such thing as guaranteed approval of credit, especially if you have had credit problems in the past or never had credit. At a minimum, credit card issuers require you to be 18 and have a steady source of income.  If you are recovering from bankruptcy, most secured credit card issuers require at least two years to have passed since your discharge before you are eligible for their card.
  • Require you to call a “900” number.  You will be charged a toll to call a “900” number, anywhere from $2 to $50 per call.  Often a company with a “900” number requires you to call the “900” number frequently, thereby increasing your charges.  
  • Are made by credit repair companies.  With few exceptions, companies that offer to repair your credit for a fee are violating Georgia law. 

A secured credit card account is beneficial to building credit only if you use it properly.  This type of account provides you the opportunity to demonstrate that you are a responsible borrower and that you pay off your bill in full each month and in a timely manner.  You can build a solid credit history over time if you have patience and make good financial decisions.