How a Secured Credit Card Can Help
by Karen Myers
When a nonexistent or bad credit rating prevents you from getting a credit card, simple transactions like renting a car or making hotel or plane reservations become impossible. Secure cards are designed for people with poor credit. In addition to allowing the cardholder to use the card for purchases, maintaining a solid payment pattern can rebuild damaged credit.
When a secure card is accepted, the cardholder must send the issuing bank a deposit. The amount of the deposit can be as low as $200 or go up into the thousands. Depending on the issuer, the credit line for the card may be set at a percentage of, equal to or greater than the deposit amount. Cardholders will be billed monthly for purchases. Like a regular credit card, the cardholder may choose to make the minimum payment or more each month and will be charged interest on the unpaid portion. In most cases, the deposit remains untouched unless the account is past due or closed.
Banks report monthly payment information to the credit bureaus. Making the minimum payment or more, on time, month after month, has a positive impact on the credit score. Cards with automatic payment plans can help cardholders stay on track. In addition, many cardholders report that knowing they could lose their deposit is the incentive they need to keep up their payments.
Like all credit cards, late fees and interest rates vary by issuer. Unlike a traditional credit card, secure cards can be loaded with hidden fees. Most secure cards have an annual fee. Banks may also charge fees for application, activation, set-up, maintenance of closed accounts or increasing your credit limit, to name a few. These fees are disclosed in the terms and conditions that accompany the account application.
According to bankrate.com's Pat Curry, "secured cards are a good choice--and sometimes the only option--for people who are just starting out or rebuilding after a major life event, such as a divorce, job loss or serious illness." She also notes that they may be the only choice available for someone just starting out.
The Federal Trade Commission has taken action against improper marketing of these cards. They warn of cases where the fees for the account ate up the entire deposit. Consumers are also warned not to respond to advertisements to call a 900 number, which is not toll-free and can cost $2 to $20 per call. In addition, if the purpose of the card is to rebuild credit, the consumer should make sure the issuer does report activity to the credit bureaus.