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If you have poor credit history, you may have difficulty qualifying for a credit card. Missed payments can show up on your credit report and negatively impact your credit score, making you appear risky to lenders and credit card companies.
A secured credit card is one option for you to obtain a credit line to help you re-establish your credit and improve your creditworthiness.
The terms “secured” and “unsecured” do not refer to privacy or security issues. Instead, they refer to the requirement of a security deposit as collateral. For example, an initial cash deposit of $300 will become the credit limit of your secured card. On the other hand, an unsecured credit card comes with a credit limit that is determined by factors like your credit history and income.
Before shopping around for a secured credit card that meets your financial needs, consider these five tips:
1. What are the terms, fees and charges associated with the card?
While secured credit cards generally carry all of the same fees associated with unsecured cards—including application, annual, and transfer fees—the rates are normally higher, says Deatra Riley, financial education manager at CredAbility, a nonprofit credit counseling and education agency.
Make sure you consider how much of your credit limit will be drained by fees. Some secured credit cards, for example, only allow a $500 deposit and then require that $99 be put towards the card’s annual fee, Riley says. In this case, only a $401 credit limit would remain for charging.
Interest rates are another important factor to consider. While many companies are currently making secured credit cards attractive by offering them at low interest rates, those rates may increase significantly after about 12 months, Riley says.
2. Will my payment history be reported to the three national credit reporting agencies?
One of your primary reasons for opening a secured credit card may be to restore your credit by continually making on-time payments. You’ll want to make sure the card issuer reports your payment history to the three national credit reporting agencies so you get this benefit.
3. Can I use the deposit for monthly payments?
A common misconception associated with secured credit cards is that the initial deposit can be used to make monthly payments if the consumer has insufficient funds, thereby avoiding a late fee or additional interest, according to Riley.
“The deposit is just going to secure the credit limit,” Riley says, “The client is still responsible for making the monthly and timely payment for the purchases they make.”
If you are unable to make a payment, the financial institution will charge a late fee or other penalty that is associated with your contract.
4. Will I be able to use the card anywhere?
Not all secured credit cards come with a major credit card logo, like Visa or MasterCard. If you plan to use your card extensively—for hotel reservations, airfare, or car rentals, for example—picking a secured card with a major credit card logo will help ensure that your payment is accepted.
5. What is my financial goal?
Because one of the main reasons for having a secured credit card may be to increase your credit score, Riley says that it’s important for you to evaluate your current financial state—including household budget, personal savings, and credit score—before opening an account.
By having a clear goal in mind before using a secured credit card, it will be easier to monitor how your creditworthiness and financial state change as your payment history is reported to the credit bureaus.
But Riley cautions that a secured credit card should not be used as a “regular means of credit” unless the user is a college student or recent graduate establishing credit for the first time.
The amount of time it takes for a secured credit card user to qualify for an unsecured card will be based on the individual’s payment history. Riley says that after making on-time payments for six months to one year, a consumer may be able to start thinking about applying for an unsecured card.
Joslin Woods is a researcher, writer, and web producer at Think Glink Publishing, with a background in print and digital media. Previously, Joslin worked as a news reporter for the international news agency Agence France-Presse and as a freelance reporter for the Sun-Times News Group. She is a graduate of Vanderbilt University and Northwestern University, where she received a master’s degree in journalism.
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