If you're looking to rebuild a damaged credit history or if you're trying to establish credit for the first time, a secured credit card might be just what you need. A secured credit card can help resolve a catch-22 problem that torments consumers in these situations: How do you get a credit card when you need a good credit history to get a credit card?
Here's how a secured credit card works: You make a deposit in a savings account and this "secures" a line of credit for you. Let's say you deposit $300 in a savings account. Your credit limit will be $300, less any fees that accompany the card. If you pay a set-up fee of $79, your credit limit is $221.
Now, if you make payments on time, in a perfect world, a secured credit card can be an effective tool to get your credit on the right track. But we don't live in a perfect world, so to make a secured card work for you, there are six essentials things you need to know before you apply for a card.
#1: Reporting to credit bureaus
You should know that some secured card issuers don't report to the credit bureaus. Since your objective is to raise your credit score or build a good credit history, you must choose a card that reports to the credit bureaus. Don't waste your time applying for a card that can't help you improve your credit history. If it's not clear when you read the terms and conditions, call the issuer and ask if they report to the credit bureaus.
#2: Paying upfront and ongoing fees
Reading the fine print has never been more important. Getting a secured card can certainly help you get your credit back on track, but you need to make sure the fees are reasonable. Common fees you might see include set-up or activation fees, credit increase fees, monthly maintenance fees, balance inquiry fees, and ATM transaction fees. Remember the $300 deposit you made? Multiple fees can whittle that down to a $200 credit limit in no time. Search our database and compare the fees charged by different secured card issuers so you can choose a card with the lowest fees.
#3: Comparing interest rates
After you've eliminated a few cards based on fees, take a look at the APR. Some secured cards will even offer introductory zero percent APRs. The credit card agreement and disclosure statements will tell you how long the introductory APR lasts. The regular APR for secured cards can vary widely, so do some shopping. The Public Savings Bank Secured Card offers a zero percent introductory APR for six months and then you get a regular APR of 11.24 percent, which is fairly good for a secured card. The Platinum Zero® Secured Visa® Credit Card from Applied Bank has a zero percent regular APR, but has an ongoing $9.95 per month maintenance fee and other fees may be assessed as well.
#4: Applying doesn't mean you'll get approved
Many people assume that since it's a secured card, it's easy to get. But this isn't always the case. For example, some banks will not issue a card to someone who has a bankruptcy on their record regardless of how old it is or how much their credit score has improved since the event. But don't be discouraged by this prospect. Do your homework--that means read the fine print on the credit card application--and look for any language that suggests a past bankruptcy might be a problem. You can also call the issuer and ask how this might affect your chances for approval.
#5: Getting a credit line
All secured credit cards require a security deposit, but the minimum and maximum amount you're allowed to deposit can vary. In general, though, don't expect a high credit limit. For instance, the credit limit on the Public Savings Bank Secured Card ranges from $300 to $2,000.
#6: Moving up to an unsecured card
Most secured credit cards can be converted to an unsecured card at some point. But even if your card issuer says that it's a possibility, it still might not happen. Just continue to pay your bills on time and know that you're building up your credit score and laying the foundation for a solid credit history. In time, your score will increase and you'll qualify for an unsecured credit card.