Should You Use a Secured Credit Card?

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 ¨C 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 ¨C 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 ¨C 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 ¨C that is to say, make small purchases, pay the bills promptly and if possible in full each month ¨C 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 ¨C 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 ¨C 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 ¨C 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.