6 Secured Credit Card Facts to Remember
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Getting turned down for credit card after credit card might make you want to bang your head against the wall. It can feel like you're stuck between a rock and a hard place, but there's light at the end of the tunnel.
If several banks have rejected your credit card application, you're probably applying for the wrong kinds of credit cards. What you might not know is that there are credit cards specific to every credit type. For a credit history that's either non-existent or in outright bad shape, you need a secured credit card.
A secured credit card works like any other credit card, with the exception that you'll have to pay an upfront security deposit. This might seem like a second-rate credit card. But by using one, you can quickly work your way up to an unsecured credit card. (See our picks for the best secured credit cards)
Here are six important facts to remember about secured cards — so you know exactly what to expect.
1. You Don't Need a Large Security Deposit
With these cards, your credit line is based on the amount of your security deposit. Fortunately, many banks allow security deposits between $200 and $3,000. So there's no pressure to come up with a pile of cash to get started.
2. Most Banks Don't Care About Your Credit History
A credit check may or may not be involved when applying for a secured credit card. But even if a bank checks your credit history, it won't focus too much on your past credit mistakes.
A secured credit card is a tool for people looking to build their credit history. Banks know the majority of applicants will have an iffy credit history, so you're likely to get approved regardless of it — as long as you're at least 18 years old with steady income.
3. Understand the Fees
The security deposit isn't the only thing you'll pay when applying for a secured credit card. If you're approved, the bank might charge a variety of fees, such as an annual fee, a set-up fee, and a monthly maintenance charge.
The cost of getting started varies depending on the card and bank, so do your research and compare secured card options to minimize fees. Additionally, compare card interest rates, since these also vary by card issuer.
Be aware that fees are charged directly to the credit card. This reduces your available credit, and unfortunately, you'll have a balance on the card before your first swipe. So if you get a secured credit card with a $200 credit line, and you pay $50 in start-up fees, you'll receive your card with only a $150 credit line.
4. It's Not a Prepaid Debit Card
About two years ago I had a conversation about secured credit cards with friends. To my surprise, some people thought secured credit cards are nothing more than a fancy prepaid credit card. (Yes, I frequently pat myself on the back for being the brightest crayon in the box.)
With a prepaid debit card, you deposit cash into a card, like a gift card. Your activity is not reported to the credit bureaus. With a secured credit card, your security deposit is collateral that the bank holds — just in case you don't make your payments.
You still receive a monthly bill every month and you're still required to make the minimum payment. If you don't pay your bill, the bank uses your security deposit to pay what you owe.
5. You Might Qualify for an Unsecured Card With the Bank
If you're working toward an unsecured credit card, you might qualify for one sooner than you think — and that's without completing an additional credit application. Some banks that offer secured credit cards also offer unsecured credit cards. If you make timely payments for 12 to 18 months, the bank might upgrade your secured card to an unsecured one and refund your security deposit.
6. Credit Reporting Matters
You need a credit card company that will report your positive account activity to the bureaus every single month — or else getting a secured credit card is pointless. Remember, the goal is to rebuild or build your credit history. And unfortunately, you won't build your score if you get a secured credit card from a bank that doesn't send updates to the credit bureaus. Read the fine print to see how often the bank reports activity to the bureaus, or call and ask customer service.
Have you ever considered a secured credit card? Why or why not?
Disclaimer: The responses below are not provided or commissioned by the bank advertiser. Responses have not been reviewed, approved or otherwise endorsed by the bank advertiser. It is not the bank advertiser's responsibility to ensure all posts and/or questions are answered.
