Secured Credit Cards

Secured credit cards are credit cards that have cash collateral required. For individuals who do not have any credit or have bad credit this can be an avenue to improve a credit score or create a credit score. Secured credit cards are offered by a number of reputable banks as well as many institutions that take advantage of customers. The applicant will mail in a deposit and this will be deposited into an account. The card then creates a credit limit equivalent to the amount of the deposit.

Terms and Fees

Each card will have terms and fees that are set by the bank issuing the card. It is essential to look around for the best offers. Consider application fees, annual fees, monthly fees, interest rates charged and minimum balance requirements.

Application Fees. This fee is charged when the applicant applies. Since all cards are approved, based on the deposit it is common for application fees to be charged in addition to annual fees. There are cards that do not charge application fees. You do not want to send in several hundred dollars for a credit card only to have the entire balance be used up by fees.

Monthly Fees. Some card issuers will charge a monthly fee. This is either a percentage of the average balance for the month or a set fee regardless of the balance. Look for a card that does not charge a monthly fee.

Annual Fees. Because secured credit cards are offered to customers with limited or poor credit history annual fees are common. The annual fee is charged as soon as the card is issued. These can range from $29 a year to $150 a year. Often cards with higher annual fees with offer lower interest rates or rewards features to entice customers to select their card. If payments are made on time each month then it is possible to move from a secured card to an unsecured card in a year or less. This means the annual fee cards are a temporary price to pay in order to improve credit scores.

Interest Rate Charges. Interest rate charges will range from 17.00% to up to 29.99%. Most states cap interest rates at 30% providing a high end for rates. As with standard credit cards interest rates are charged when a balance is carried from month to month. If the card is paid in full by the due date then no interest charges will be incurred.  

The best way to use a card is to get one with a high rate of interest, increasing the likelihood of a lower or no annual fee card. Then use the card exclusively for say food or gas. Each month when the bill comes in pay the balance in full. Many cards offer online account management allowing payments to be made at any time during the month. If self-control is an issue then pay the card each week for the total amount charged. This will get the credit score up as quickly as possible and keep the costs of using the card to the lowest level. This can result in obtaining a standard non-secured credit card in about 6 months. One important note is that if the balance is always zero this will not help your credit. On the same day every month the credit card issuer will report the balance and payment to the credit bureau. Knowing this date and having a balance on this date will enable the card to improve your credit.

Minimum Deposit Requirements. The deposit requirements can be as low as $49, but typically range from $200 to $500. Each company will have different deposit ranges. The credit limit will be in direct proportion to the deposit made. If you send in $500 then the credit limit will be $500. After a period of time, as long as payments are made on time, the card issuer will extend the line of credit to a larger amount and may eventually offer an unsecured credit card, resulting in the return of the deposit.

If payments are mot made on time then the credit score will be further degraded. In the event of non-payment or default the bank will use the deposit to pay off the credit card.

Making a Deposit

Deposits can be made either online, over the phone or by mailing in a check or money order. Once the deposit is received a card is issued. Upon receiving the card check the remaining balance as any application or annual fees are charged upfront.

Overall Assessment

There are good companies that offer secured credit cards as a way to help consumers improve their credit score. There are other companies that gouge customers and take advantage of their vulnerable situation. Read the fine print of every offer and consider the fees that are being charged for the card.

Reputable companies may offer incentives for paying the account on time and will reward you with a higher limit or unsecured card after 6 months to a year. Six months of on time payments is generally the minimum for an increased line or conversion to an unsecured card.

Not all secured credit cards report to the credit bureau. This can be a problem since the reason for getting a secured credit card is to increase your credit rating. Make sure the card you select reports to the credit bureau. Debit cards are not reported to the credit bureau so sometimes obtaining a secured credit card is the best option for improving credit. Make note of how you spend, as generally poor spending habits are the reason for damaged credit. With no changes to spending it is easy to get in behind on payments again.

The credit rating and credit score has many factors. These include types of credit used (loans versus lines of credit), on time payments, length of time credit has been established, and utilization ratio. The utilization ratio is the amount of credit that is available on credit cards, versus the amount that is used. For example if you send in $500 and receive a card with a limit of $500 then your maximum available credit is $500. If you charge $500 worth of spending you have 100% utilization. This ratio should be kept at 50% or below in order to increase the credit score as quickly as possible.