Secured Credit Cards

What’s the point of even the best secured credit card? All these products require consumers to lodge a deposit with the card issuer that is equal to the credit limit. Yet, even though the cardholder is effectively borrowing her own money, she still has to pay interest if she carries forward a balance. Why would anyone do that?

Who Wants a Secured Credit Card?

It’s Catch 22 for millions of Americans: it takes credit to get credit. Young people who lack a credit history, and adults who’ve been through a financial crisis have low or no scores. It’s these people who often turn to secured credit cards to build or rebuild a score through the back door. That’s because the approval criteria for these products are much easier than for most other accounts, and (unlike most prepaid cards) the best secured credit cards to rebuild credit do report to the Big Three credit bureaus.

One other group might also find this sort of plastic attractive. Studies suggest some people are hardwired at birth to be bad at looking after their finances: they may find they can never get a mainstream credit card without maxing it out in months. Such consumers may reach a point where they want to avoid the pain of out-of-control card debt, but still want the convenience that plastic provides. Secured cards can limit their ability to financially self-harm, and getting one can be a very smart move indeed.

How Easy Is It to Get a Secured Card?

Even though card companies know they can’t lose the money they lend on these products (because the upfront deposit equals the credit limit), they won’t issue them to just anyone. That’s presumably because they could still miss out on fees and interest if a borrower defaults.

However, they rarely place much emphasis on an applicant’s credit score, if any. Instead they generally require:

1. The deposit, usually between $200 and $500
2. Income to make at least minimum card payments
3. A Social Security number or taxpayer identification number
4. No open bankruptcy (discharged bankruptcy is OK)

Some may also have minimum income thresholds, and require applicants to catch up with any accounts on which they’ve fallen behind. Anyone applying to a bank or credit union with which they have an existing or past relationship can expect their internal file to be reviewed.

Although some of these criteria sound intrusive, it’s important to remember that card issuers don’t expect high levels of creditworthiness. The bar is set much lower than for mainstream plastic.

Choosing the Best Secured Credit Card

As with ordinary cards, it’s important to shop for the best secured credit card that most closely matches the individual’s needs. If anything, it’s even more important with secured products because there are some real horrors on the market. The most important factors surround cost:

1. Annual fee: It’s possible to pay anything between nothing and $100+ regardless of whether one actually uses the card.
2. Other fees: For example, how much does it cost if one makes a late payment?
3. Application fee: It’s charged just for processing the application. That can be a very bad sign.
4. Annual percentage rate (APR): These are relevant only to those who do carry forward balances (others never pay any interest).

If the main reason for opening a secured account is to build or rebuild a credit score, it’s vital that the plastic reports to all three of the big credit bureaus — Equifax, Experian and TransUnion. Card issuers that do make this very clear, so assume that one that doesn’t advertise the fact doesn’t. Absent that reporting, the chances of the card budging a credit score by a single point are remote.

At their best, secured credit cards can be powerful tools that can boost a score surprisingly quickly. But, used badly, they can lower a score just as fast. So it’s important to apply only when one’s confident of making every payment on time. For the best results, borrowers should keep the card’s balance below 30 percent of its credit limit — or, preferably, pay it off every month. To keep focused on the goal, it’s often a good idea to use a free credit score monitoring service that allows one to track progress.