Secured credit cards are the bankers response to the risk involved in lending to those with no established credit history or a poor credit history. Both groups pose a risk of potential default which leaves the banks unwilling to extend unsecured credit without some form of collateral. Secured credit cards require customer collateral in the form of a secured deposit equivalent to the line of credit extended.
Using secured credit cards allows consumers to establish or rebuild credit if the cards are used in a responsible manner. Making timely payments and only utilizing less than 30 percent of available credit will ensure that positive reports of credit card use are reported to the three main credit bureaus. Most banks that issue secured cards will monitor their use and allow card holders who establish or improve their credit to move onto unsecured credit, usually at some point after 12 months.
There is usually an annual fee imposed to obtain a secured card though the amount charged will vary between providers. Interest rates tend to be high, but again vary with providers. Some secured cards now offer a balance transfer facility which can be useful for those with bad credit who want to change from a sub prime provider who imposes a very high interest rate.
Security deposits in some cases attract interest from the bank. Customers are not allowed to access their security deposits until the secured card is closed. Banks do not use the deposit to cover late or missed payments thus leaving the customer liable to late fees. Deposits are only used by the banks when customers are in a default situation and fail to respond to bank collection activity.
Customers who wish to increase their credit limits need to increase their security deposits to match the higher limit, and are often charged a fee to increase their credit limit. Credit limits may be as low as $200, which can be reduced even further if the annual fee is deducted from the credit limit, a practice of some providers.
Using secured cards can be an ideal way for youngsters to learn how to use credit responsibly whilst at the same time establishing a credit history. Consumers should base their choice of card on their intended use of credit in order to minimise costs. The balance between a card with low fees or a low interest rate needs to be considered.
Those who never plan to carry a balance should seek a card with a low annual fee, whilst those who plan to carry a balance should make their decision based on the APR. As an example the Open Sky secured Visa and the First Premier secured card both levy an annual fee of $50, but the APR’s vary considerably at a current 9.75% and 19.9%. The Capital One secured MasterCard has a lower fee of $29 but a higher APR of 22.9%. Other secured card providers include Orchard Bank, Merrick Bank, Wells Fargo, and Fifty Third Bank.
Using secured credit cards in order to move to unsecured credit cards is a very viable way to establish or rebuild credit, and used responsibly need only be a short term stepping stone. They have the added advantage of encouraging savings as they impose the discipline of requiring a deposit for their use.