Secured Credit Cards

Credit cards have become the preferred shopping toll for millions of Americans throughout the country. However, for some consumers with poor or no credit history, obtaining the traditional unsecured credit card can be virtually impossible. These consumers can obtain many of the same benefits through a secured credit card.

What is a Secured Credit Card?
A secured credit card is like a secured loan; the consumer deposits money into a savings account or certificate of deposit (CD) as collateral for a line of credit. The card is the same in appearance as an unsecured card and offers the same convenience and charging privileges as a traditional unsecured credit card.

Secured credit cards are ideal for applicants who intend to build or re-establish their credit history. However, a secured card is distinguished from an unsecured card on your credit report and does not necessarily guarantee future approval for an unsecured credit card. For applicants intending to built or re-establish credit, it is suggested that they carry a balance for several months and make all payments on time. This creates a positive credit history, which is beneficial to the cardholder when approaching future lenders.

While secured credit cards are a viable option for almost everyone, there are some limitations. Most issuers do not accept applicants that have been convicted of credit card fraud, have outstanding liens on their property, or are filing for bankruptcy.

Choosing the Right Card
When shopping for the right secured card, it is imperative that you consider and compare the benefits and drawbacks for each one and measure how each fits with your personal needs and spending habits. Factors such as application fees, annual fees, finance charges, accrued interest on the deposit, available line of credit and minimum savings deposit are some of the most important considerations.

Application Fees
Some secured credit card issuers require an application fee, which adds to the cost of obtaining a secured card. Of the banks surveyed, over 20% require an application fee. In some cases, the fee is non-refundable even if the applicant is not accepted by the issuer.

Annual Fees
Annual fees also add to the cost of having a secured credit card account. Annual fees cover the cost of maintaining the account. The majority of banks surveyed did charge an annual fee, averaging around $40.

Once accepted for a card, an applicant is required to make a deposit into a savings account or a certificate of deposit as security. According to information in the BBB's survey, the average minimum deposit needed was around $300.

The amount of money a consumer deposits should depend on his/her annual income and the line of credit desired. Our survey showed that the credit offered to consumers is usually the same or greater than the amount deposited. A few issuers, however, offer a credit limit lower than the amount deposited.

Interest Payments
Most of the banks surveyed (94%) pay you interest on the security deposit. However, the amount paid varied greatly from a low of less than 2% to a high of 6.17%. The more money you wish or are required to deposit, the more important it is to have a card that offers generous interest payments.

Finance Charges (Annual Percentage Rate)
The Annual Percentage Rate (APR) is the interest charged on outstanding balances. Our survey showed that, as with interest payments, the APR varied greatly, from a low of 9.72% to a high of 22%. The lowest APR will help minimize your costs. Obtaining a card with the lowest annual percentage rate is most important for consumers who are likely to maintain an outstanding balance.

Additional Fees
The majority of issuers charge additional fees for use of the card and services associated with the card. Additional fees may be charged for: cash advances, late payments, charging over the limit, non-sufficient funds, and for accessing account information. Some issuers may limit the number of transactions in a given time period to protect against overdrafts. To avoid being stuck with a multitude of excessive fees, consumers should carefully review the information provided by the bank to determine how and when fees are charged.

A secured card can be canceled by the consumer with written notification. After receipt of the written notification, issuers have different policies concerning the amount of time before the customer receives his/her refund. A majority of the banks surveyed use the deposit to pay the outstanding balance, with the remainder mailed to the cardholder within 60-120 days. While some banks charge penalties for early cancellation, customers are not required to pay annual fees if they notify the issuer in writing that they wish to cancel their account within 40 days of receiving the statement containing the fee.

The issuing bank can also cancel a secured credit card account. Banks will normally revoke a consumer's charging privileges when the account is in delinquency. The amount of time that the issuer allows the account to lapse before cancellation depends on the particular issuing bank.

Establishing a Credit Record with a Secured Credit Card

  • Make sure that the card issuer reports back to a credit bureau so that you can start establishing a credit history.
  • Try to pay all your bills on time. If you have trouble paying bills, contact a credit counseling service.
  • Look for a card that has a low interest rate so that in case you fall behind on payments, you will be able to afford the late charges plus what you originally owed.

Secured cards can be a tremendous convenience and offer the opportunity to improve your credit worthiness. However, finding the best one for you requires research since the best card for one consumer may very well be the worst for another. To find the best card for you, determine what features are most important to your financial situation and spending style, measuring them against the costs associated with each offer.