Benefits of Secured Credit Cards

Written by Curtis Arnold
Posted On: February 11, 2009

An excerpt from How YOU Can Profit from Credit Cards: Using Credit to Improve Your Financial Life and Bottom Line.

A secured card is often the best answer if you can't get a traditional card. Secured cards are accepted wherever credit cards can be used, and certainly come in handy for emergencies and for transactions when having a credit card is advantageous, such as when you're renting a car.

Secured cards function just like other cards. If payments aren’t made in full each month, you’re charged interest. The lender will not tap into your savings account for the interest—or the payments. If you’re late with a payment, the rate goes sky-high, just as high as it would with an unsecured card. And if you use the card irresponsibly, you’ll damage your credit. The security deposit won’t help.

If you can squirrel away the $200 or $300 typically needed for a security deposit, it’s likely that you can get a secured card, which will help you:

  • Establish credit. If you’ve never had a credit card, secured cards are a good first step in building credit. “A secured card is most useful for the person starting out on their credit history,” explains Dr. Jerry Plummer, an economics professor at Austin Peay State University, “since it says that the person is willing to take the extra step to establish credit.”
  • Reestablish credit. If your credit history is damaged (Dr. Manning estimates that 40 million U.S. consumers have bad credit), you might not be able to qualify for a traditional card. But you’ll probably be able to qualify for a secured card, unless you’ve had to file for bankruptcy. Generally, you won’t be able to get a secured card until the bankruptcy has been discharged.
  • Gain built-in debt protection. Was excessive spending partly to blame for your bad credit? A secured card can act as a safeguard, making it harder for you to get in over your head again. You’ll know that your credit is secured with your own money. If your account becomes delinquent, it will likely be closed and your security deposit will be seized. Knowing this will help safeguard you from racking up more card debt.
  • Avoid subprime or fee-harvesting credit cards. These cards are known for gouging and preying on people with bad or no credit. The fees on subprime cards can easily total $200 to $300 in just the first year, which is about the size of the credit lines they offer. Don’t fall for a subprime card and have almost all of your credit line eaten up by fees. The issuer is the only one who benefits from these cards!

You can also compare secured credit cards offers on CardRatings.com!
 

About the author:
Curtis Arnold
Curtis Arnold, a nationally recognized consumer educator and advocate, has been educating consumers about credit cards since 1998. New! Curtis is the author of "How You Can Profit from Credit Cards: Using Credit to Improve Your Financial Life and Bottom Line" (FT Press, 2008). He is also the co-author of the upcoming Complete Idiot's Guide to Person-to-Person Lending (Alpha Books/Pengiun Group USA, April 2009), a contribitor to The Ultimate Allowance (InnerWealth Publishing, 2008) and is extensively featured in 42 RulesTM for Driving Success With Books (Super Star Press, January 2009).
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