Are Secured Credit Cards a Good Idea?
- Secured credit cards provide a credit line in return for a deposit that matches the credit limit amount. The deposit stays in a bank account as a guarantee of repayment. The issuer processes transactions as it would for a regular credit card account, with each purchase counting against the credit line. You have a minimum monthly payment requirement and can send more if you wish, and the bank can seize the deposit if you stop paying.
- Secured credit cards serve an important purpose for certain consumers. For example, young people with no financial history can get secured cards even if they do not qualify for regular accounts, according to MSN Money columnist Liz Pulliam Weston. Consumers with past credit problems like payment delinquencies, collection accounts and bankruptcy can also get secured accounts. These credit cards can help them to repair their credit score, so that they can eventually get unsecured credit cards, loans and other credit accounts. Secured cards also offer the convenience of making online purchases or buying things in stores without carrying cash.
- Secured credit card accounts tend to be more expensive than their traditional counterparts. Banks charge higher fees and interest rates on such accounts. Also, some banks will not report activity on these accounts to the credit bureaus, which renders them useless for repairing bad credit or building up an initial credit history. Check the fees and interest charges before applying for a particular card, and ask the bank if it reports account information to Equifax, Experian and TransUnion. If the costs are too high, or the issuer does not report to the credit bureaus, look for a different card.
- You only need a secured credit card account temporarily to create a financial history or rebuild damaged credit. The MyFICO credit scoring website explains that timely payments have a strong positive effect on your score, so a year or two of responsible secured card use will give you a good credit rating. Eventually, the bank will probably convert your account to a regular credit card, according to Liz Pulliam Weston, and you will qualify for other traditional accounts.