How Secured Credit Cards Work

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Padlocked Green DoorI’ve been reading a lot of credit and credit scores lately because a lot of people are focusing on cleaning up their personal finances during this recession. For folks to have no credit or poor credit, rebuilding or building up your can be difficult and expensive. If you can’t get unsecured credit to establish your history, the next best option is to get secured credit. If you need a car and can get a car loan, that’s the best way. If you don’t need a car or you can’t get a loan, the next best thing out there appears to secured credit cards.

Read on to learn more about secured credit cards, how they compare to a debit card, how they improve/build your credit score, and what to watch out for if you’re looking for one.

A secured credit card is just like an unsecured credit card with one important distinction. With an secured credit card, you are required to make a security deposit. The secured credit card company then issues you a card with a limit equal to the amount you deposited. From there, you use the card as you would an unsecured credit card. You can use it wherever you see the Visa or Mastercard logo, you will receive statements, and you’ll make payments on your balance. The only significant difference is that you must first make a security deposit (that’s the “secured” part).

Secured Credit Cards

Here is a popular secured credit card:

First Option Visa® Card is another secured credit card that has a maximum limit of $5,000 and you will be approved regardless of credit history or income. No credit check is required and you are approval is guaranteed.
Click to Apply Today!

All companies will establish a lower and upper limit for the credit limit, usually between $300 and $5,000. Some cards will give you a credit limit of 90% (or some other percentage) of your security deposit. If you deposit $1000, they offer a limit of $900. They will specify this in the terms and conditions.

Why would you ever get a secured credit card? If you want to build or establish your credit and you can’t get an unsecured credit card. If you can get an unsecured credit card, there’s no point in getting a secured one.

Why not get a debit card? Debit cards don’t report to the credit bureaus because there is no credit involved. The bank isn’t lending you any money, they’re merely making it more convenient for you to spend the funds in your checking account.

But isn’t it like a debit card? No, when you charge a purchase to a debit card, the money is debited (withdrawn) from your bank account. When you charge a purchase to a secured credit card, your security deposit isn’t touched. You don’t pay for your purchases with the security deposit. You have to come up with other money to pay the balance with.

Secured Credit Card Fees

The big thing to watch out for with secured credit cards are the fees. Here are the fees you’re likely to see:

  • Application fee. Almost every secured credit card will have an application fee somewhere in the neighborhood of $50 to $100. If you can find a company or bank that doesn’t charge a fee, give them serious consideration because that’s an instant cost savings.
  • Annual fee. Every secured credit card will have an annual fee and they can range from $30 to as much as $100.
  • Expedite fee. If you are in a rush, some offer the option of paying an expedite fee to get the card faster.

Converting to Unsecured Card

You’ll want to convert from a unsecured card to a secured card as quickly as possible, so ask potential secured credit card companies how many months of responsible credit usage would it take for you to get an unsecured card. Expect the answer to be about a year. After a year, you should check your credit score anyway to see where you stand. If you can get an unsecured card, I’d recommend you get one with good rewards anyway.

What Else To Watch Out For

Be sure the secured credit card company reports to at least the three major credit bureaus every month. If you must, call and ask to see if they send monthly reports to Equifax, Experian, and TransUnion. You’re getting a card to improve your score, so don’t get one that doesn’t report your good activity! Credit reporting is optional, so companies don’t necessarily report good or bad behavior.

Ask how the fees are charged. Some will deduct it from your deposit. Others will charge them to your card. Be aware of how the company plans on assessing these because it can have big impact. If it’s deducted from your deposit, then you’ll have a lower limit. If they charge them to your card, they may assess interest before your next payment is required.

Review the grace period policy. With unsecured credit cards, you get a grace period if you pay off your balance in full each month. Some secured credit cards work the same way, you get a grace period if you pay off your balance each month. However, some secured credit cards don’t offer any grace period so the interest accrues immediately. You want to watch out for that.

You also need to ask if your security deposit earns interest. Some places will offer you a nominal interest rate on your deposit while others won’t offer any interest at all. While it’s nice to earn a little interest, I don’t think it’s a big deal either way but it’s not universal across all cards.

For more information about secured credit cards, I recommend checking out the Federal Reserve Board’s page on choosing a credit card. It doesn’t specifically cover secured cards but does mention them and contains good general information about all types of cards.

Secured credit cards aren’t great products, they’re simply a means to an end for someone with little credit history or poor credit history. Many people have pulled themselves out of credit score purgatory with these cards, you just need to be aware of the pitfalls as well as the benefits. If you get one, it’s recommended that you make a few purchases on the card each month and then pay it off in full each cycle.

Have you ever used, or considered using, a secured credit card to establish or improve your credit?

(Photo: zebble)

{ 18 comments, please add your thoughts now! }

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18 Responses to “How Secured Credit Cards Work”

  1. barry says:

    Many of my friends are not from the U.S. and when they came here as adults, had no credit. Most of them used Secured Credit Cards to establish credit. That enabled a couple of them to get car loans. Then they were able to get mortgages and unsecured credit cards.

    There’s a “cost of credit” -> fees and not the best interest rates – but overall painless.

  2. EmBee says:

    I guess it’s the way how most the immigrants get started with building credit.:)

    • barry says:

      funny how they never needed credit before they came here! now, they simply cannot survive without it!

      • EmBee says:

        yeah, it does sound funny.:) I guess it’s because the different finatial system.. In the developing country, like in China, people were used to pay or play with cash only. Even now things are different, but the finatial system is still under construction.:)

      • Yana says:

        One thing that peeves me about Bank of America is their marketing of Mexican immigrants. I feel like they are exploiting these people in pushing their cards at them. I don’t know if they are still up to this, given the current economy, but they were very aggressive in doing this in the not-so-distant past. I’d say if some foreigners suddenly think they need credit, it is because they’ve been strongly encouraged to play that game by those who would exploit them.

        • Anisa says:

          No, Yana, it is because they DO need credit – not because they’re pressured into “thinking” they do. The Government shouldn’t be left with providing that too.

          • val says:

            NO, YOU DON’T NEED CREDIT!
            This government sells you this idea and you jump to the bait
            You CAN get a car without credit, you can buy what you need without credit
            When it comes to buying a house, this government makes you think this is the best way to live…WRONG
            You can rent or you can wait until you have the money for a house

      • Jorge O. says:

        What make you think we never need a credit before? I can survive without a credit and i did have credit before but credits from other countries doesn’t have anything to do with the us credit companies.

  3. Yana says:

    My husband didn’t exist in the credit world until he got a secured credit card with Capital One. I hated the $18 annual fee, which is why he didn’t keep the card after credit offers started rolling in from other issuers for fee-free credit cards. It didn’t take very long.

  4. Splendor says:

    Thanks for the write up.

  5. Shock says:

    My wife had poor credit before I met her. In order for us to improve her credit score, she got a secure card. I didn’t know you could convert a secured card into an unsecured card. She’ll have to try that out. Thanks for the post.

  6. Michael Tillett says:

    After speaking with a my financial consultant, a mortgage lender, and an online representative from Bank of America, I applied for a Secured VISA. For thirteen months, since purchasing a new 2008 Honda Accord, I have been current on my auto payment, and have been diligent in attempting to rebuild my credit history. There are a few derogatory items on my credit report that I am presently working with a credit advisor on clearing up, mostly medical bills. There is only one line of credit on my credit report. In applying for a Secured VISA card, using money that I clearly have and that Bank of America is free to check into, I attempted to open up another trade-line, at NO RISK to Bank of America. Rather than try and build a good new customer relation, Bank of America thought it would be of more interest to them if they would just decline my application. As a certified high school teacher here in South Carolina, I will be letting many of my friends and colleagues, some of whom may already be Bank of America customers, know of this experience.

  7. Faray Mussa Kalume says:

    Dear sir
    I’m more pleased to discover your your Visa credit card Site, I need to attribute me a visa card number and VCC number charged in your terms and conditions and let me know the refunding modalities and other add conditions.
    Being living in Africa especially in Burundi -Bujumbura council Town.
    Your assistance is more interesting and attending.
    Faray Mussa

    • val says:

      Your posting it sounds like your very next move is to offer one of “THOSE” money orders in exchange for your card…something like that

  8. Ruth T says:

    I will be getting a secured credit card at the end of this month. Currently I have no TV Service and only Dial-Up Internet – WHY? Because Comcast, DirectTV and AT&T decided that the MasterCard eCard my SSI monthly income goes to (A whopping $865 per month!) is in reality a GIFT card – so will not give me – AT&T/ DSL, the others TV Service. And when I have it I will go DishNetwork for TV Service as they at least will not demand $200 deposit just because I am poor. To have a “Real” Credit Card at my income level would be a very stupid move – If I don’t have the money this month and won’t have it in full next month I don’t need the merchandise others “charge” so readily. I do need to have something appear on my TV, especially the news (& Army Wives) – and I desparately need high-speed internet as my. life revolves around being a social/political advocate online. I am disbled, have no friend or family nearby and refuse to just “exist” until an early death!

  9. lalo says:

    because of them building credit tontos!!!!!!!!!!!!!!!

  10. cathy says:

    USBANK turned my application for a “Secured Credit Card” down. I was DENIED. I don’t think people are aware that they run a credit check on you and are not so easy to get. I had a bankruptcy a few years ago that USBank had to write off all of 500.00 from and that’s why they said they DENIED ME.

    I was a customer with them for 12 yrs, maintained bank balances ranging from 18 – 45k a month spread over 5 accounts.. and I was DENIED. Not only that but they hit my credit reports so I have what is called a “Hard Hit” meaning an inquiry and those also hurt your chances of rebuilding credit.

    Needless to say, I have removed all excess cash from accounts at USBank (still bank with them) but they don’t make money off my money anymore!


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