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.
Deposit
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.
Cancellation
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.
Conclusion
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.
