7 Questions to Choose the Right Secured Credit Card
Trying to make it in today's society without a credit card is tough. Hotels, car rentals, and airlines are just a few of the places that credit cards are required. Even if you have enough cash to cover your purchase, many places still ask that you pay with a credit card or at least use a credit card to secure your reservation. Using a debit card may suffice, but in some cases, the company may place a hold on a funds or require you to pay a hefty security deposit.
Prepaid cards are often not accepted, which means they're not an option.
Secured credit cards are viable alternatives to regular credit cards. The major difference is that you have to put down a deposit to secure your credit limit. Your security deposit is typically returned when you close your account or the card issuer converts your card to an unsecured credit card as long as you make timely payments and keep your account in good standing.
If you're considering a secured credit card, answer these important questions to make the best decision.
What fees does the secured credit card have?
A secured credit card may have application fees, processing fees, and annual fees. As with other credit cards, the fees for a secured credit card are disclosed in the credit card offer and the card's terms and conditions.
Be sure to evaluate and understand the fees before you apply. Compare the fees on the card you're considering with the fees on other secured credit cards to get an idea of whether you're paying too much.
Don't apply for an expensive secured credit card. The goal is to build your credit up enough to qualify for an unsecured credit card.
No sense in paying more than you have to.
What is the minimum security deposit?
Secured credit cards are “secured” with a deposit that's kept in a savings account (sometimes an interest-bearing account) and used only when you default on your payments. There will be minimum and maximum deposit limits.
A secured credit card with a low minimum requirement is easier to get; that means you won't have to come up with as much money to receive the credit card. It also means you'll have a low credit limit. As you're shopping around, have an idea of the deposit you're able to pay and rule out the cards with minimum security deposit requirements outside your budget.
What will your credit limit be?
Your credit limit will likely be equal to your security deposit. Some cards offer a credit limit different from the security deposit. The Capital One Secured MasterCard, for example, allows qualifying applicants to pay a security deposit as low as $49 for a $200 credit limit.
What is the APR on the secured credit card?
The APR, or annual percentage rate, is the interest rate applied to balances that you carry beyond the grace period. The higher the interest rate, the higher your finance charge will be when you carry a balance.
The APR is one of the most important deciding factors with any credit card because it influences the cost of carrying a balance. Secured credit cards tend to have higher interest rates than unsecured credit cards, so don't expect to get the most competitive rate. You can avoid paying interest on your balance by paying it in full.
Will your payment history be reported to the credit bureaus?
If you want the credit card to help establish or re-establish your credit, the credit card issuer must report to the major credit bureaus - Equifax, Experian, and TransUnion. Secured credit cards that don’t report to bureaus will give you credit card purchasing privileges, but won’t help your credit rating. Reporting to an alternative credit reporting agency won't really benefit you because only a few lenders use these credit reports.
Do you have the option to convert to an unsecured credit card?
The best secured credit cards allow you to convert to an unsecured after a period of timely payments, like 12 to 18 months. Unsecured cards often have lower fees (or no fees at all), a lower interest rate, and fewer restrictions. Best of all, unsecured cards don't require you a security deposit.
If the best card for you is one that doesn't convert to an unsecured credit card, it's not a huge worry. You can always apply for an unsecured credit card once you've established a history of responsible borrowing and repaying.
Is the secured credit card offered by a reputable bank?
People with bad credit and no credit - the ones who typically shop for secured credit cards - are often targeted with predatory products. Some secured credit cards on the market have absurdly high interest rates and fees. Avoid applying for a card from any bank that sounds sketchy, even if the offer seems like a great deal.
More people are giving feed back and reporting scams on various internet sites. Do an internet search for the credit card you're considering to learn what others have experienced with that secured credit card and the credit card issuer.