Secured Credit Cards

Specifics of Secured Credit Cards

A secured credit card is a credit card that requires you to make a deposit that is used as collateral to secure a line of credit.  This can be an ideal way for consumers with no credit history or previous credit problems to build good credit.  You build credit by demonstrating responsible use and making payments on time.

If you have had credit problems and are getting back on track, you should be considered for a secured credit card as long as your credit problems are in the past and are now under control.  Even if you have filed bankruptcy, many companies will still consider you as long as your credit report does not show earlier unpaid debts not settled in the bankruptcy proceedings.  In general, make sure your bills are current and there has been no negative information reported on you in the six months prior to applying.

There is no physical difference between a secured card and an unsecured credit card.  They look and work the same.  The difference is that you make a deposit (for a secured card) that is used as collateral in exchange for a line of credit.  An unsecured card does not require a deposit.  Your deposit is not accessed unless you seriously default on the credit card account, and if you close the account, most issuers wait two billing cycles before releasing your deposit. Many companies pay interest on your deposit. Think of it as a savings account that may even earn interest, while building a good credit history.

Minimum deposit requirements can vary among companies. Some issuers will accept applicants with a deposit as low as $100 while many require $500.  You can deposit more than the minimum required.  Generally, the amount of your deposit equals your credit limit.  A good general rule of thumb is to try to deposit at least 5% of your annual income.  Keep in mind that even though you're making a security deposit, that doesn't guarantee you'll be approved.  If you've ever been convicted of credit card fraud, bankruptcy fraud, or have unsettled tax liens, you'll rarely be approved.

Most charge higher annual fees and interest rates than unsecured cards. Once you have a secured credit card, use the card once or twice a month for something you were going to buy anyway and pay off the balance every month. Think of it as a stepping-stone or temporary (one-two years).  When you are re-established, you can shop for a credit card with better terms.

Policies vary with secured credit card companies for converting a secured card to an unsecured card (one without a deposit). Some (not all) secured card issuers will review your payment record at the end of the first year and, if favorable, return your deposit and convert your account to unsecured.  Others may raise your credit limit, and others may require you to request an account review to convert your card to an unsecured card or raise your limit.

Finding a Secured Credit Card

If you are considering using a secured credit card to build good credit, take your time, ask questions, and do your research because policies vary.  Start with the bank or credit union with which you already belong and ask if they offer secured credit cards.  If you don't belong to a credit union, consider joining one at your place of work, through a family member or through organizations with which you belong.   Learn more about credit unions at www.cuna.org.  You may also search the Internet for secured credit cards at www.cardtrak.com (click on find a card under Card Locator and then select secured). Since consumers with past credit problems can be targets for scams Refer to our section on Credit Card Scams.

The following is a list of questions to ask when shopping for a secured credit card.  Remember to ask your questions before applying, so that an inquiry does not show on your credit report. If you are not interested, don't like the terms or if the company will not consider you, find another company.

• Do you accept people with previous credit problems or those who have filed bankruptcy?
• Do you report my payment history to the credit bureaus?
• What are the terms and fees associated with this card (make sure you understand them)?

Terms

• What is the minimum security deposit required to open an account?
• Will my credit limit be equal to my deposit?
• Is interest paid on my deposit, and if so, how much and when does it begin earning interest?
• What is the annual percentage rate (APR)?  Is it fixed or variable?
• Are there transaction limits?  For example, if you are limited to five transactions per day, this might pose a problem if you are out of town or on vacation and need to use your card frequently.
• Is there a grace period?  How long is it?

Fees

• What are ALL of the fees involved with this credit card including annual, monthly, over-the-limit, late, and cash advance.  In addition, ask about any one-time set up fees, such as a processing or application fee.
• Does the issuer charge a special fee to access or review information on your account?  For example, will they charge you every time you check your balance even from an automated system?  Will they charge you to review your account to increase your limit?

• How long will it take me to be considered for an unsecured card?  Is this automatic or must I request it?
• For what reason(s) would my account be revoked and what is the fee to reinstate the account?
• Is there a 24-hour customer service number?
• Lastly, READ THE AGREEMENT including all fine print!