Understanding secured credit cards
In today’s digital world, it’s hard to do anything without a credit card. Sure, a debit card helps. But life’s little emergencies always seem to pop up right when you’re a little short on cash.
If you have good credit, it’s easy to get a credit card. On the other hand, if you haven’t established much credit, or worse yet, your credit score has taken an unfortunate downturn, what can you do? One possibility is a secured credit card.
The concept is pretty straightforward. You deposit a certain amount into an interest-bearing account at the card-issuing institution and agree to leave it there. In return, the institution issues you a major credit card with a credit limit equal to the amount of your deposit. If you default on your credit card, the institution can seize your deposit to satisfy your debt.
Like any other product, there are good secured credit cards and not-so-good secured credit cards. Here are three things to consider when evaluating a secured credit card:
Interest rate: The first and most obvious thing to consider is the card’s interest rate. Some institutions offer secured credit cards for as low as 8.99%, while rates in the high teens or low twenties are more common. Be careful, though. Some predatory secured credit card providers charge as high as 36% interest.
Fees: Reputable financial institutions don’t gouge you with excessive fees. Unfortunately, the same can’t be said for many secured credit card providers. For example, some of these companies require both a $125 annual fee plus a $120 annual maintenance fee. That means if you start out with a modest $500 credit limit, your starting available credit will actually only be $255. And of course, you’ll pay interest on those fees because they show up as charges on your card.
How it’s reported: An unsecured credit card will look better on your credit report than a secured one. Interestingly, some secured credit cards report as secured, while others report as unsecured. While this isn’t necessarily a deal breaker, you should be aware of how your particular card reports.
