In today’s world it’s nearly impossible to buy anything without a bank card. Even if you intend to pay cash later, one is typically needed to make reservations or secure a hotel stay among other things. Debit cards tied to your bank account can of course fill that need, but they also carry greater risk and fewer protections than a standard credit card if the number is stolen or used fraudulently.
It’s also quite difficult for someone trying to build or repair their credit history to find a credit card plan that will work with them without adding really high interest rates and strict repayment terms. Of course, taking on a standard credit card can also be a really big problem if uncontrolled purchasing has been an issue in the past.
Luckily there is a third option, getting a secured credit card.
A secured credit card is a vehicle for building a good credit history because the card company reports monthly balances and payments to the major credit bureaus in turn helping your credit score. You also typically get the higher security benefits of a credit card if the card is stolen and there is an unknown charge.
This type of card requires that you deposit a specified amount of money with the card issuing company. This money becomes the amount of credit you have on that card. For example, if you deposit $500 in the account; you can charge up to $500. You can typically put as much money on the secured card as you like, but it’s a good idea to keep it under $1000.
Depending on the company, if you make the agreed upon payments over time, they may then release the funds held as security and issue you an unsecured card with better terms. You could also continue to use the card as a secured card for as long as you need while you rebuild your credit. Use it for a few purchases and pay it off in full every month.
Another great way to use a secured credit card is to help older teens and college age kids get started with their own credit history. By making them a user on your card, or providing them with their own with a few hundred dollars balance, they learn how to make regular bill payments and use the card responsibly while building their credit history.
How do I find a card plan?
When you are shopping around for a secured card be sure to review all of the terms. Watch for annual service fees, hidden fees and charges, and take time to shop around for the best interest rates and lowest annual fees. Some cards offer cash back or rewards for using the card, but don’t get it based solely on this feature – usually fees tend to be higher for this kind of card. Also make sure that your initial deposit is completely refundable.
One of the downsides of a secured card is that it does require a deposit and some fees up front. If you are having a hard time coming up with the deposit try setting aside $20-$25 per month for a few months until you have enough to open the account.
Remember that it may take six months or more to begin to see any changes to your credit score. Credit history is built over time and new users with no credit history will see larger improvements than someone trying to repair their credit.
It’s also important to get your monthly payments in on time and work hard not to carry a balance on the card. Interest rates even on secured cards can be incredibly high (18-35%) so make sure that you are meeting your obligations. Carrying a maxed-out balance even on a secured card can still hurt your credit.
When do you know you’re ready to upgrade from a secured to unsecured card?
Some credit card issuers conduct automatic account reviews to determine if secured cardholders may qualify for an unsecured account based on their payment histories and other factors. This might happen after the first six months or later. If your card provider does not offer automatic reviews, after a reasonable time you may request an upgrade on your own. If you have a secured card that charges an annual fee, you might be able to upgrade to a no-annual-fee card.
Before you make the switch to a traditional card, make sure that you are ready to accept the terms of a traditional credit card and can use it responsibly. It can be easy to fall into old spending habits.
If you need help with credit repair, would like to talk about how to improve your budget to make ends meet or learn more about our financial services please contact one of our certified counselors at 877-798-4172 or info@ffef.org.