Dangers of Secured Credit Cards

Avoid Common Problems With Secured Credit Cards

Secured credit cards can help you build credit. However, they can be expensive and they are sometimes marketed by dishonest 'lenders'. Find out how to avoid common pitfalls when using a secured credit card.

The Fees

Secured credit cards often come with higher fees. You’ll pay more in interest because you don’t have a solid credit history. Once you build credit, lenders will know that you’re good for the money and you can get more competitive loans.

You may also have to pay high application, processing, and annual fees. These fees may be almost as much as your credit limit, so the secured credit card becomes less useful than you thought.

Is a secured credit card worth the cost? Reasonably priced cards are certainly worth it if you want to borrow in the future.

If you can only find cards with high fees, decide whether or not the fees are worth the benefit of building credit. You may pay several hundred dollars this year, but save several thousand once you get a mortgage. On the other hand, you might be able to live without credit (by using a debit card for purchases). While none of the alternatives are attractive, review your options and decide what’s best.

Credit Reporting

The main reason to use a secured credit card is to build credit. After you’ve done that, it’s best to move on. However, some secured credit card providers do not report to credit reporting companies.

The only way you can build credit (in the mainstream at least) is to show a history of borrowing responsibly. Most lenders use a few information sources (the three major credit bureaus: Equifax, Experian, and TransUnion) when evaluating you as a borrower, so you want to be sure you appear where they’re looking.

Before getting a secured credit card, ask if the provider reports to those companies. After you get the card, verify that the account is being reported by viewing your credit reports.

Outright Scams

Secured credit cards can attract scam artists. Thieves know that your options are limited if you need a secured credit card, so you’re less likely to reject offers - even if they’re fishy. The best way to avoid trouble is to work with reputable lenders.

Start by asking if your bank or credit union offers secured credit cards. If they don’t, check with other reputable banks in your area. Be wary of big promises, 'credit repair' outfits, and companies you can’t find any information on.