These days, it’s very tough to conduct certain transactions without a credit card. Try reserving a hotel room or renting a car without one.
For consumers with bad credit or no credit, it’s almost impossible to get a credit card, making many of these transactions out of reach.
One option for those consumers is to apply for a “secured” credit card. Unlike a traditional credit card, these require a cash deposit that becomes the credit line for the account. For example, if you put $500 in the account, you can charge up to $500.
Secured cards are a good steppingstone for credit-challenged consumers.
“The first step when rebuilding credit or establishing credit for the first time is to get something good on your credit reports,” said John Ulzheimer, president of consumer education at SmartCredit.com. “Credit scoring systems like to see that a consumer is jumping back into the credit environment after a credit disaster, and the secured credit card is the easiest and least expensive way to do so.”
But secured credit cards aren’t like traditional unsecured cards, so you need to ask key questions:
How much do you need to deposit?
The deposits range from $200 to $500, according to a survey conducted in April by Bankrate.com.
“You are making a deposit that is held as collateral, and that’s why card issuers are willing to take a risk on a borrower with no credit history or a poor credit history,” said Greg McBride, senior financial analyst at Bankrate.com.
But he noted that the credit lines tend to be smaller on a secured card than on a traditional credit card.
“You’ve got to be mindful of what the limit is so you don’t go over it,” McBride said.
Where can you get a secured credit card?
Shop around. If you’re a credit union member, ask about a secured card there. About half of the nation’s credit unions offer secured cards to their members and may offer lower interest rates and waive annual fees.
Also, Bankrate.com maintains a list of secured credit card issuers.
What fees will there be?
Look for a secured card that doesn’t charge an annual fee or application fee. Among issuers that charge an annual fee, the cost ranges from $18 to $40, according to a Bankrate.com survey, so again it pays to shop around.
Does the issuer report to all three major credit bureaus?
This is critical for secured credit card holders because not every secured card issuer reports to the three credit bureaus — Experian, TransUnion and Equifax.
Remember that your goal with a secured card is to rebuild your credit or start building a credit history when you haven’t had one.
If a card issuer doesn’t report your secured card history to all three bureaus, you run the risk of a lender pulling a credit report on you where your good payment record on the secured card isn’t shown.
“The best strategy is to open a new secured card issued by a lender that reports to the credit reporting agencies,” Ulzheimer said. “If they don’t report the account to the credit reporting agencies, then you’re wasting your time and won’t get any rebuilding value out of using the card.”
You want your good financial behavior to count for something.
How long will it take to qualify for an unsecured card?
If you manage your secured card well, there’s a good chance you’ll eventually qualify for a regular credit card. So ask your lender about its timeline; the average length is about a year, according to Bankrate.com.
But you really have to be disciplined. You should ask about the card’s annual percentage rate but avoid carrying a balance on the card.
The average APR on secured credit cards is 17.46 percent, compared with an average 14.4 percent on a traditional credit card, McBride said.
“Don’t fall for that ‘you have to carry a balance to establish credit,’” he said. “If you use the card for occasional purchases and always pay the balance in full, then you can have your cake and eat it too — building your credit history without incurring interest charges.”
“The interest rates and fees aren’t the best in the industry, but if you never revolve a balance, then your cost to carry the card will be minimal,” he said.
“Remember, the reason you have this card is to rebuild your credit. It’s not for the purposes of racking up credit card debt, which will delay your credit recovery efforts.”
So pay on time and don’t go over your credit limit, and your good financial behavior will ultimately pay off.
Source: MCT Information Services