Secured Credit Cards
Qualifying for a credit card can be a vicious circle if you have a poor or insubstantial credit history. You need a good credit history to get a credit card, and you need a credit card to get a good credit history. The reluctance of credit issuers to approve applicants without good credit is understandable; they have no idea whether or not you’ll pay your bill.
Secured credit cards attempt to solve this problem. In contrast to unsecured cards, secured cards require you to send the credit card company a cash deposit as collateral for your account. (The collateral is secured by the credit card company, hence the term “secured credit card.”) Your credit limit on a secured card is generally the amount of your cash deposit, although sometimes it is a percentage of your deposit. In case you default on your payment, the credit card company can simply take the money out of your deposit and close your account. Your deposit is stored in a savings account, which often earns interest.
Advantages of secured credit cards
Secured cards enable you to obtain credit when you wouldn’t otherwise qualify. By obtaining a secured credit card, you can rebuild your credit over time, and later qualify for a traditional unsecured credit card.
Think of secured credit cards like a credit card sandbox. They let you learn to use credit responsibly and pay your statement balance on time.
Disadvantages of secured card cards
Secured cardholders invariably have poor credit histories and consequently few credit options. The lack of options opens individuals with poor credit to being taken advantage of by sub-prime credit issuers. For example, issuers of secured cards still charge cardholders much higher interest rates even though the line of credit is completely secured by a cash deposit. Similarly, secured cards often charge exorbitant application fees in order to even being considered for a card.
How to choose a secured credit card
Before opening a secured credit card, you should decide whether you are ready to handle credit. If you have bad credit in your past, you should honestly evaluate whether you can and will pay your bills on time. You’ll thank yourself in the long run. It is all too easy to spend too much and fall behind.
If you decide that you should open a secured credit card account, take your time shopping. Stay away from creditors that charge enormous application or setup fees to open an account. Avoid creditors that impose ridiculously low credit limits.
Not all secured credit cards report payment information to the credit reporting bureaus. It is critical that you choose a card that reports this information. Why? The information must be reported in order to improve your credit. The whole point of applying for a secured credit card is to restore your credit rating. No sense in carrying a card that doesn’t do anything to re-establish your credit history!
The “bad credit” industry is filled with lots of scam artists and slimy companies. However, there are some reputable secured card issuers. We recommend secured cards issued by Orchard Bank. You should also check with your local credit union to see whether they offer a secured credit card. Local credit unions often offer more favorable terms than mail-order or Internet sources, especially if you already have an account with them.
Alternatives to secured credit cards
The best possible situation is to avoid secured cards altogether. Often gas station credit cards have lower eligibility requirements than bank cards, but better terms than secured cards. Try applying for a gas station credit card first. As with secured cards, make sure the card issuers reports your payment history to at least one of the credit reporting agencies. Secured credit cards should be viewed as a last resort.
If you are a full-time student, credit card companies recognize your need to build credit on a limited income. Student credit cards are unsecured credit cards that lower eligibility requirements (and lower credit limits) than standard credit cards.
