7 Questions to Ask When Choosing the Right Secured Credit Card
Trying to make it in today's society without a credit card is tough. Buying airline tickets, reserving a hotel room, or renting a car are just a few examples of purchases that are difficult without a credit card. 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 funds or require you to pay a hefty security deposit. Prepaid cards often are not accepted, which means they're not an option.
Getting approved for a credit card with no credit or poor credit history is tough. A secured credit card might be the only way to start your credit or improve your credit history.
Secured credit cards are similar to prepaid cards because they rarely extend actual credit. You have to put down a security deposit that typically is equal to your "credit" limit. But they are a better option than a prepaid card if you are trying to build credit because your card usage is reported to the major credit agencies. Use the card responsibly, and you can begin to build or repair your credit. Your security deposit typically is returned when you close your account or the card issuer converts your card to an unsecured card, which sometimes is an option if you make timely payments and keep your account in good standing.
What Are the Fees?
A secured credit card may have application fees, processing fees, and annual fees. As with other credit cards, the fees are disclosed in the offer and its 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 up your credit enough to qualify for an unsecured credit card. There's 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.
Cards with low minimum deposits are easier to get, but they'll also have a lower 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 of your budget.
What Will Your Credit Limit Be?
Your credit limit likely will 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?
The APR, or annual percentage rate, is the interest rate applied to balances 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 every month.
Build a Positive Credit History
If you want the credit card to help establish or re-establish your credit, make sure the credit card issuer is reporting to the major credit bureaus—Equifax, Experian, and TransUnion. Secured credit cards that don’t report to bureaus are effectively just prepaid cards and won’t help your credit rating. Reporting to an alternative credit reporting agency also won't 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 card 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 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 always can apply for an unsecured credit card once you've established a history of responsible borrowing and repaying.
Is the Card Offered by a Reputable Bank?
If you're shopping for a secured credit card, you likely have bad credit or no credit and might be targeted by those selling 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.
Do an internet search for the credit card you're considering to read reviews and learn what others have experienced with that card and its credit card issuer.