By now, you’ve probably heard of secured credit cards. Secured credit cards work like this: You give the lender a security deposit, and then receive a credit line for that amount. For example, let’s say you give the credit card company $1,000 to put in your account. You will typically then have a credit line of $1,000.
But are secured credit cards really all they’re cracked up to be? Let’s look at the pros and cons of opening a secured credit card:
- You can establish or rebuild your credit. If you are just starting out, the credit card companies may want to see some credit history before giving you an unsecured card. A secured card may be your only option. Likewise, if you’ve had credit problems in the past, such as having to declare bankruptcy, opening a secured credit card may be the best (and only) way to rebuild your credit.
- Tip: Make sure the issuer reports to the three credit reporting agencies each month if your main goal is to build positive credit.
- If you shop around, you can quite possibly find a good secured card with a reasonable annual fee and low interest rate.
- Provided you make your payments on time and are a good customer, you can often qualify for an unsecured card after about a year or so with the same lender.
- You will make interest on your security deposit. Typically, you will earn as much as you would with a savings account. However, you’ll be paying much more in fees than you’ll earn.
- You’ll need to research lenders thoroughly beforehand.
- There are more than a few shady companies out there, and if the bank you are dealing with fails or places other conditions on your account, you may have a hard time getting your security deposit back once you decide to close your account.
- So, you’ll want to do your homework and make sure you choose a reputable company. One way you can do this is make sure your money will either be in a federally insured bank account or with a solid credit union. And watch out for online scams.
- You could actually damage your credit further if you don’t have a solid payment plan in place. If you opened the secured credit card to improve your credit, the last thing you want is to lower your credit score even further. But, if you don’t pay your bill on time each month, the issuer might report that to the credit reporting agencies.
- So if you’re trying to rebuild your credit because of late payments in the past, be sure you address the reasons why you previously paid late beforehand so you can avoid repeating the same mistake twice.
- You may be subject to high fees. Virtually all secured credit cards come with an annual fee, so make sure that having a secured credit card accomplishes your desired outcome. The annual fees and interest rates are almost always higher with secured cards than unsecured ones, so make sure you can’t qualify for an unsecured card first.
- Also, be sure to read the fine print of the terms and conditions, because some cards may use up a large chunk of your limit on fees before you ever spend a penny of it.
If you do decide to get a secured credit card, your best bet may be with a credit union as they generally offer the lowest rates. And make sure you weigh the pros and cons beforehand so you can make an educated decision.
This article has been reviewed and approved by Thomas A. Moore, managing attorney Brownstone Law Group, PC. California Bar # 148698. This article is for informational purposes only, does not provide legal advice of any kind or form any type of attorney/client relationship.
The services of Brownstone Law Group, PC.and its affiliates may not be available in all states.
CONTACT US TODAY
Get in touch to learn how we can help.
Ready to Be Debt Free?
Why Choose Us?
- A Rating With the Better Business Bureau
- Charter Member Of the Business Consumer Alliance With an AAA Rating
- Licensed With the State Bar of California
- Many Satisfied Debt Free Clients
- Hands-On Approach Providing Personalized Service To Each Client
- Flexible Program Terms Custom Tailored To Each Client