Secured Credit Cards
Secured credit cards can help you get a credit history if you have bad or no credit. A secured credit card is associated with a savings account. The credit card holder is given a purchasing limit, based on the amount that is in the account. You can use a secured card to build up your credit history. You can even earn interest on the savings accounts tied to your secured credit cards.
How Are Secured Credit Cards Different?
A secured credit card is different from an unsecured credit card because
your credit limit is based on a deposit that you place in the bank for
collateral, rather than on your credit history. The collateral is required
because the credit company is taking a risk by offering you credit. In
general, secured credit cards tend to have lower credit limits. Not all
card issuers and financial institutions offer secured credit cards. After a
specified period of time, usually a year or two, some secured cards may
convert to unsecured credit cards.
Building Your Credit Rating
Secured credit cards can help you to build your credit rating if you use
them properly. The best way to build a credit history with a secured credit
card is to pay off the balance each month and not to miss a payment. If you
misuse your credit card while you are trying to restore your credit, you
could wind up making it worse. To improve your credit score, make sure that
the particular secured card that you are using reports transactions to the
major credit bureaus.
Earning Interest On Your Deposit
One of the nice things about having a secured credit card is that it
forces you to save money. Because secured credit cards are tied to a
savings account, you will earn interest while your money is in the account.
Typically, the interest amount that you receive will be comparable to the
interest rates offered by regular savings accounts.
Fees and Interest Rates
The fees and interest rates charged on secured credit cards vary from card
to card. Typically there is an annual fee and there may be other fees such
as set up fees and monthly fees as well. The interest rate on secured
credit cards may be somewhat higher than the interest rate on other credit
cards. Generally speaking, the lower the fees and interest rates are, the
better. It's best to compare fees and interest rates to get the best deal.
However, avoid applying for more than one credit card at a time because
this could damage your credit history. To find specific information about
fees and interest charges for a particular secured credit card, check your
cardholder agreement.
The Bottom Line
Secured credit cards can help you establish or restore your credit
history. A secured card can even force you to save and you may earn some
interest. If you have paid your bills on time, many secured credit cards
will convert to an unsecured credit card. When shopping for a secured
credit card, be careful to avoid those cards with the highest fees and
interest rates.
