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The Nuances of Secured Credit Cards

The Nuances of Secured Credit Cards

Don’t let a name fool you.

Secured credit cards, though much touted by consumer advocates as one of the most effective ways to establish and build credit, are not always easy to get.

If you have had bad credit, delinquencies, or no credit history at all, don’t expect to be a shoe-in for such a card.

Secured credit cards are training wheels in an effort to build or restore credit.

Consumers must put down an initial deposit for the card, which can range from $100 to $500, and that deposit becomes the line of credit against the card. The credit line is usually 100 percent of the deposit according to Consumer Action.

Just because it can be an easy way to get credit, doesn’t mean the process of applying itself is easy. It is possible to be declined for a secured credit card.

Criteria for Approval

Depending on how tough the application terms are, applicants may be required to provide such things as proof of U.S. citizenship, income, a Social Security number, a home phone number, and a home address.

John Hall, spokesman for the American Bankers Association, said delinquencies and bankruptcy will make it harder to get a card.

Hall said even if the applicant is approved, the card may come with high fees or high interest rates. He said that’s why consumers need to shop around (check our Card Reports section for a comprehensive listing of secured cards). The best rated secured cards have an annual fee of $35 or less and an interest rate in the mid-teens.

Linda Sherry, a spokeswoman with Consumer Action, said that depending on the bank, some secured card issuers won’t approve a card if the bankruptcy is too recent.

Sherry said having no credit at all is probably the easiest situation in which to apply for a secured credit card.

She recommends applying for a secured credit card through a local bank or credit union. She said credit unions may be more likely to take people without prior credit than those who have had a bankruptcy.

Gerri Detweiler, author of The Ultimate Credit Handbook, said if someone has had a bankruptcy and they are approved for a secured card, they will usually get offers for unsecured credit cards in six or seven months.

She also cautioned that high fees can eat up the available credit, especially on a small credit line.

But Hall said secured credit cards aren't the only way to go if someone doesn’t have credit. According to Hall,


“Generally, if you’ve never had credit, you’re going to have other options available to you [to establish credit].”

One thing for certain is that secured card issuers typically make sure that they are covered in the cardholder agreement.

The Security Deposit

For example, some secured cards will not return the deposit if the cardholder defaults. Sherry said the money that you hand the issuer is out of your control. She added that it takes a serious default for them to take money out of the security deposit.

Bank of America’s secured credit card terms say it is protected against debts the cardholder runs up, it can revise the policy at any time, and that a minimum $250 deposit is required.

report_featuredoffersSherry recommends that cardholders do what they’re supposed to do -- make small charges and pay them back, and in six months they will typically get offers for unsecured cards from credit card companies.

Sherry said Consumer Action has found that people get very confused between secured credit cards and unsecured subprime cards. Subprime cards are for people with bad credit and often come with exorbitant fees (as high as $300+ in the first year alone) and high interest rates.

Consumer Action has heard complaints about subprime issuers such as First Premier Bank that Sherry says have tried to steer people out of secured credit cards to unsecured subprime credit cards.

Sorting out the confusion could also be why secured credit cards are seen as high maintenance.

Detweiler said secured credit cards have been viewed by the industry as a hassle when it comes to customer service.

She said it sounds like an easy card to offer, but it can be challenge in terms of a high level of hand holding with these cards. She said that immigrants, for example, may not understand how the cards work.

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