Secured credit cards can help establish credit for those who have none

So what is a secured credit card?

A secured credit card is one that has a limit that is “secured” by a cash deposit. The lender is, in effect, completely protected from default by the borrower. If he or she doesn’t pay the bill, the company has the cash to cover it.

Can I get one from any bank?

Not every bank offers them, but many do. There are a number of Websites that allow consumers to compare credit cards; you can probably find one there. Or you can go to Google and do a search for “secured credit card.” You will probably find thousands of responses.

Are they all the same?

Not at all. In addition to the one-time deposit that typically ranges from $300-500, you can certainly expect to pay an annual fee, but those will vary from bank to bank. Some issuers also require application fees that are nonrefundable even if the applicant is turned down. Others tack on a lot of junk fees, such as insurance. These cards are not particularly cheap.

What’s the worst case?

The worst case is an application fee, a high annual fee, a high annual percentage rate and a monthly “access” fee. With some of these cards, all of these fees for the first year are charged to the card at the time it is issued. We know of one card that has a mere $29 left on its limit when it arrives in the mailbox. Like we said, these cards vary widely; be sure to read the agreement carefully before you sign up.

How can these accounts help establish credit?

Assuming that the issuing bank reports to the credit bureaus, the user can make purchases each month and pay the bill in full. Over time, this will show up on the customer’s credit report as a series of regular, on-time payments. This will, probably within a year or so, allow the cardholder to apply for a more traditional, unsecured account. Be sure to check with the issuing bank ahead of time to verify that they do report to the credit bureaus. Most, but not all, of them do. If they do not, you are wasting your time as well as your money.

A secured credit card is not a cheap way to borrow money, but if you have a history of financial trouble and you are trying to dig out or if you are an immigrant without a credit history in the United States, it may be the ideal way to establish credit quickly. Just remember that there are two kinds of banks that issue these accounts - one that wants to help people and one that wants to make as much money off of people as possible. It is up to you, the consumer, to read the agreement carefully in order to tell the difference.

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