A Secured Credit Card Can Repair Your Credit Score — Here's How to Pick the Best
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When you have no credit history, or if you have poor credit and are trying to rebuild, one of the options you have to rewrite your credit story is the secured credit card.
A secured credit card is a credit card in which you offer collateral in exchange for a line of credit. You pay a deposit, which is held in a separate account, and you are extended a line of credit. You can use a secured credit card anywhere credit cards are accepted, but you will likely have a lower credit limit. In fact, much of the time, your credit limit is based on your deposit. (See also: Pros and Cons of Secured Credit Cards)
If you show yourself responsible, it's usually possible to convert your secured credit card to an unsecured credit card after about a year. You get your security deposit back, and you have a "better" credit card that affects your credit score favorably.
But what should you look for when choosing a secured credit card? You don't want to get stuck with a secured card that makes matters worse for you — and some cards can make things worse for you. Before choosing, here are some things to consider.
The best secured credit cards only charge an annual fee. It would be nice if you could find a card with no annual fee, but these are few and far between. The Digital Federal Credit Union Secured doesn't come with an annual fee, but you do need to make a $10 donation to Reach Out for School in order to join the credit union. Most secured cards have an annual fee, but you can usually find fees between $29 and $45. If the annual fee is higher than $45, look elsewhere.
Watch out for secured cards that charge other fees as well. Some secured cards charge monthly fees and setup fees. When a secured card claims no annual fee, look for the monthly fee (luckily the DFCU Secured doesn't come with any fees). There are secured cards that charge setup fees as high as $75. If you have an annual fee of $50 and a setup fee of $75, that's $125. If your credit limit is set at $200, you are already more than halfway there — and that's just from initial fees.
There are other fees to watch out for as well. Some of the worst secured credit cards charge you each time your credit limit is increased or decreased. You might even find an "insurance" fee as well. This is bogus, since the point of your security deposit is to act as "insurance" against default.
Read the terms and conditions carefully, and avoid secured credit cards with a large number of high fees. (See also: Look Out for Credit Card Checkout Fees)
Be Sure the Issuer Reports to the Credit Bureaus
The only reason to get a secured credit card is for help with building your credit. As a result, it makes sense to choose a card that reports to the credit bureaus regularly. (See also: Steps to Rebuilding Your Credit)
It's important to find out if the card issuer will report, and also to find out if the card will be converted to an unsecured card later. An unsecured card looks better on your credit report and helps your credit score more than a secured card.
Watch out for prepaid debit cards. These look like credit cards, and you might be able to use them like credit cards, but they are debit cards. You aren't extended a line of credit, and your activity won't be reported to the credit bureaus. Be sure that you are getting a secured credit card when you apply.
Be Smart About Interest Rates
Next, look for a low interest rate. Many secured credit cards have relatively high interest rates, but you can find some cards, like the DFCU card, that have relatively low rates, in the 11.50% to 13.99% range. In most cases, though, you can expect to see an APR between 17.99% and 22.99% for most secured credit cards. If the secured card starts getting into the 25.99% APR range, you should think twice.
There are plenty of reputable secured credit cards that charge reasonable interest rates. Once again, though, watch out for credit cards that charge low APRs, but come with a raft of fees. The Public Savings Bank Visa Secured is a good example of a card to avoid because of its fees. The APR is a low 11.24%, but there is a $75 setup fee and a fee charged each time your credit limit is changed.
If you can pay off your credit card balance each month, the interest rate isn't such a big deal, but the other fees can really set your finances back. One good tactic for raising your credit rating using a secured card is to spend just a few dollars, say $20, on the card each month. That way, you can easily pay off the full balance each month. By showing the card issuer you can make consistent, on-time payments, your credit rating will improve. (See also: Surprising Ways to Hurt Your Credit Score)
Understand the Security Deposit
Finally, pay attention to the security deposit requirements. Some secured cards will grant you a credit limit that matches your deposit. So, if you have a deposit of $300, you can expect a credit line of $300. There are some secured credit cards that require a higher deposit than what you'll receive as a credit limit. Stay away from these secured cards, especially if they charge high fees on top of that deposit.
There are some secured credit cards that have a more generous policy when it comes to security deposits. Depending on your credit rating, the Capital One Secured Credit Card will allow you a $200 credit limit with a security deposit as low as $49. Of course, if your credit is especially poor, you still need to put in the full $200 to get the $200 limit. Look for a card that makes allowances and may allow you a higher limit based on a lower deposit.
Some of the best secured cards will let you choose your deposit, which means you can get a much higher limit. With the US Bank Secured Visa, you can make a security deposit of up to $5,000 and get a card with a higher credit limit. Another bonus offered by the US Bank Secured Visa is that your security deposit is kept in an interest-bearing account, so when you get the deposit back, it has grown.
(Note: the Capital One Secured Card and the US Bank Secured Visa are among Wise Bread's top picks for secured credit cards.)
Most secured cards won't keep your deposit in an interest-bearing account, though. But it's a nice feature if you can find it.
Before you choose a secured credit card, make sure it's right for you, and that it will help — not hinder — your financial situation.
Did you use a secured credit card to repair your credit score? What was your experience like?