There are really only a few times you'd need a secured credit card:
- You want to rebuild your credit profile after enduring a severe financial setback, like a bankruptcy or a serious account delinquency.
- You have limited or no credit.
- You frequently rent cars and stay at hotels, for which you'll need a credit card.
- You want the stability of a certificate of deposit, but you're worried about penalties if you need to dip into savings for an emergency.
Secured credit cards fell out of vogue for a few years, until the credit crunch inspired a new era of caution among lenders. Many consumers who lost access to credit cards during the recession switched their allegiance to prepaid debit cards and to debit cards linked with checking accounts. However, debit cards don't carry the same perks and protections as credit cards. Debit cards don't report credit utilization and payment histories to credit bureaus. Likewise, a disputed debit card charge can tie up your cash for weeks while your bank and a merchant work out their issues.
Using a certificate of deposit as collateral for your secured credit card allows you to earn interest as well as have access to money if you need it.
The best secured credit cards on the market cost less than $40 per year in annual fees, and carry relatively reasonable APRs. They're great for travel expenses, especially with vendors who like to place large holds for incidentals or insurance. You don't want a hotel locking down your checking account balance just to cover your minibar tab.
Yet, you really don't want to make a habit of spending cash to borrow your own money. Secured credit cards typically work best when you make a few modest charges each month then pay the balance in full after the close of the statement cycle. Having a small balance when the statement closes helps to improve your credit score because that small balance is the typically the only amount reported to credit bureaus. So, be sure to pay your balance in full each month and avoid those unsightly finance charges.
- Does a credit union secured credit card make as positive an impact on credit scores as one held by a major commercial bank?
- Does an unsecured card build credit faster than a secured card? Does FICO rate them differently?
- Can I have a family member co-sign a credit card, so I can get an unsecured credit card?