Credit cards are a fact of life these days. They
offer convenience, safety for your money, and an
easy way to establish or repair your credit history.
A lot has been written about the negative aspects
of secured credit cards –
high interest rates being the most damaging thing
to be said of them.
What price would you put on the ability
to buy a house? Or getting the loan you need to
buy the car you want? How much is it worth to you
to have a good credit history? Secured credit
cards offer the best chance for many people
to establish and clean up their credit history.
They are, in essence, a first step on the path back
to financial health.
In these days of easily available
credit histories and credit scores, more and more
credit card issuers are relying on credit reports
as their final arbiter of whether to extend credit.
If you’re a young adult who has never taken
out a loan or had a credit card through a parent
before, or if you’re recently divorced and
never had a credit card in your own name, you’ve
probably experienced the frustration of ‘I
can’t get credit because I’ve never
had credit’. ‘Lack of credit history’
is one of the most often cited reasons for denial
of a credit card application.
Secured credit cards offer an easy
way for ANYONE to begin building credit. Because
your credit is ‘secured’ by your own
money, the credit card issuer knows that if you
default on the bill, they will get their money.
By holding your money, they also encourage you to
make your payments rather than lose your security
deposit.
How about a credit card with a security
deposit? When you rent an apartment, a landlord
may ask you to put an amount equal to a month’s
rent into a special account. That money isn’t
touched and is returned to you, with interest, when
you move out – if there is no damage to the
apartment and you don’t owe him any money.
A secured credit card works on the
same principle. You place a security deposit that
is equal to 50-150% of the amount of your credit
limit in a special account with the credit card
issuer. The company sends you a credit card and
you proceed to use it just as you would a regular
credit card – because it is. No one but you
and the credit card issuer know that the card is
secured by a security deposit.
If you use your secured credit
card properly – that is to say, make
small purchases, pay the bills promptly and if possible
in full each month – the security deposit
isn’t touched. You can periodically increase
the amount of credit available to you on that card
by increasing your security deposit – or,
with many secured credit cards, the issuing company
will gradually increase your credit limit from 50%
of your deposit to 75% to 100%.
Are the interest rates on secured
cards high? In most cases, yes, of course they are.
If you’ve been turned down for credit by other
credit card companies, you are considered a significant
credit risk – any lender charges interest
rates based on their risk, and these companies take
a significant risk in lending you money. A secured
credit card is not the ideal card for those with
excellent credit who can qualify for low rates from
other companies that offer rewards and all the perks.
It is exactly what it purports to be – a way
for someone with damaged or no credit to begin to
repair their credit by showing that they can responsibly
handle a credit card.
