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What is a Secured Credit Card?
Trying to decide which credit card to choose can sometimes be a daunting task. Not only do you need to compare card features, and consider the “true costs” of any card you select, but you need to consider the type of card you’ll qualify for. If you’ve got Excellent Credit—generally, a FICO score of 750 or above—and a reasonable income, this part is easy because you’ll likely qualify for 90 percent of cards on the market today.
However, if you have a limited credit history or derogatory marks (i.e., a negative history) on your Credit Report, you may not qualify for a traditional credit card. For people in these situations, a Secured Credit Card is often the best way to establish or rebuild your credit history, because your current Credit Score will rarely affect approval.
First, it’s important to note that, to merchants, secured Credit Cards are the same as any other type of credit card. While not all credit issuers offer a secured card, several do, and they all come with either the Visa or MasterCard logo. Part of the reason secured cards are so useful is that they can be used exactly like other credit cards, including for hotel and/or rental car reservations, at retailers, at online merchants, etc.
But it’s more important to know how a secured card differs from traditional credit cards. Generally, the secured credit card is distinct from the Unsecured Card in three ways:
- A deposit is required
- The credit limit tends to be low
- Fees and interest rates will be higher
Because secured cards are for higher risk borrowers, the bank will want you to deposit a pre-determined amount of cash into an account. When you apply for a secured credit card, upon approval the credit issuer will tell you how much you need to deposit to activate the card. It’s important to read the terms and conditions of any credit offer so that you will know, before applying, how much you’re likely to pay. But usually, the deposit amount is 50 - 100 percent of your credit line, and will be determined by the specifics of the card issuer, as well as by your credit score. For example, you might receive a request to deposit $200, at which point your credit line will be somewhere between $200-$400. As you use the card wisely, your credit line may increase (without any additional deposit), as will your credit score. And what happens to your deposit if you decide to cancel your card in the future? The card issuer will require you to pay off any remaining balance on your account, and will then refund your entire deposit.
As mentioned earlier, the credit line on a secured credit card will be lower than on most traditional cards because the issuers consider people that possess lower Credit Scores to be more of a financial risk. In order to limit this risk they require a deposit, plus they set the amount that you can borrow to be much lower than with traditional cards. This may seem like a negative aspect of secured cards, but for most people it is better to begin with a low credit limit that you learn to manage well, before moving on to a card with a much higher one.
In addition to these features, Secured Credit Cards also have higher fees and interest rates than many other traditional Unsecured Credit Cards. A typical fee for a secured card is anywhere from $25 to $100 per year. Since you won’t receive any added benefit from paying a larger annual fee, it’s best to search for a card that offers the most competitive fee structure. But it’s essential to keep in mind that you probably will not find a secured card that is totally free, so consider how much you can afford to pay each month before applying. Also, if you carry a balance—for even a day—it’s possible you may be required to pay interest on the balance, large or small. Currently, the average APR for credit cards is between 14-16 percent, but for secured cards it’s significantly higher. Thus, it’s always wise to avoid carrying a balance on these cards, for even one day, which means you should charge only as much as you can afford to pay off the same day. Remember, a secured credit card can help you build or re-build your credit score, but you should never use it like a traditional credit card. Here are some secured credit card offers:
Ultimately, if your goal is to raise your credit score it’s important to know how a secured credit card can help you do that. Just like traditional cards, your secured credit issuer will report how you use the card to the major credit bureaus (Experian, Equifax, and TransUnion). The best secured cards are ones that report to all three agencies each month. In order for you to get the most from your secured credit card it is important to use it wisely, to never carry a balance (or if you do, to carry a balance less than 30 percent of your limit), and to make your payments on-time every month.
Want more? Apply for one of these secured credit cards today:
by CreditQ Staff
Published 07/05/2012 15:39
Credit Card Info and Advice
Credit Card Info and Advice
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