Secured Credit Cards Are Not Just For People With Bad Credit
Many consumers, especially students, find they do not have an adequate credit history to qualify for traditional, unsecured credit cards. If you're one of those people who can't get credit because you either haven't built a credit history or yours is already damaged, secured credit cards might deserve a look. The best secured credit cards allow you to convert them to unsecured cards after a certain period of timely payments which saves you money in the long run.
Secured credit cards require a cash deposit of anywhere from $200. to $500. as collateral to get you started. Then you can charge up to the amount you have put in your account. You may be able to add to the deposit to obtain more credit, or sometimes your bank will adjust your credit line once you establish a track record of timely and responsible payments.
Gather plenty of information when you apply for a secured credit card. As in any industry, some lenders are good and some are bad. The good ones have low fees and treat their customers with respect. The bad ones prey on those in a desperate situation, charging high fees for every little transaction. Some important considerations when selecting secured credit cards include the interest rate, fees, and the deposit required. This is where it pays to shop around. Try to find a card that doesn't charge an application fee as there are many to choose from. Annual fees are standard, but they can vary dramatically from one lender to the next. Read the fine print. Some people have gotten secured cards and found their entire limit consumed with fees before they ever even used the card.
One of the main reasons people choose secured credit cards is because they are a great way to build the credit history needed to transition to traditional credit cards. By making all payments to your creditors on time and keeping your balance below the credit limit you can establish your credit worthiness in a relatively short amount of time - as little as six months to a year. However, if your lender doesn't report to the credit bureaus, you've lost a major benefit. Make sure your issuer does this and that they don't charge an additional fee for this service. Also, ask them not to report your account to the credit bureaus as a secured card as that could limit your credit building efforts.
A couple of other considerations include the interest rate you receive on your deposit and how long your deposit is kept upon account closure. Generally, the interest rate will match about what you'd get from a savings account. Not like you're going to get rich on that, but if you're keeping your charges small and paying them off monthly like you're supposed to, it can add up. Secondly, some banks will want to keep the deposit for a couple of billing cycles after you close your account to cover any stray charges that could still trickle in. Knowing that up front can help you avoid any unnecessary surprises.
The key to getting the most out of secured credit cards is to limit yourself to just a few small charges every month and pay them off monthly too. Showing you can handle credit with regularity without carrying a balance or making late payments will help build your reputation of creditworthiness and shows a readiness to take on more responsibility.
While secured credit cards force you to not spend more you can afford, it's not a good idea to keep one any longer than you have to. All secured cards have annual fees with higher interest rates and fees than traditional, unsecured credit cards. But if you can prove the ability to use a secured card responsibly, you will be able to qualify for a regular card in short order.
Again, make sure your lender reports your payments to all three national credit bureaus and don't miss or delay a single payment and you should see improvements in your credit score in as little as six months to a year, depending on where you started. The best secured credit cards allow you to convert them to unsecured cards after a certain period of timely payments. Transitioning to unsecured cards as soon as you can is best because they usually have lower fees (or no fees at all), a lower interest rate, and fewer restrictions.
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