Qualifying for a credit card can be tough if you have a poor credit record, but a secured credit card may be one way you can obtain one.
With a secured credit card, you deposit a certain sum—usually between $300 and $500— in an account with a bank or credit union. In return, the financial institution issues you a credit card with a credit line limited to the amount in your account. If you fail to make payments on a secured credit card, the bank takes the money out of your account.
There are some good points and some downsides with secured credit cards:
- You’ll be working towards rebuilding your credit score. By making the required payments on your secured credit card on time, you get the opportunity to demonstrate your credit worthiness to a financial institution.
- The financial institution should report your account to a credit bureau, which should help bring your credit score up over time. That makes you more attractive to lenders.
- A secured credit card can help you qualify for an unsecured credit card down the road.
- You are limited in how much you can charge. A secured credit card will force you to keep your spending under control simply because your credit is limited to the amount that you keep in your account. (This can change over time; a bank may actually raise your credit limit to more than your account balance if you demonstrate that you’re handling your credit account well.)
- You’ll enjoy the convenience of having a credit card. There are times when it’s just easier to use a credit card to pay—when you’re purchasing online, eating in a restaurant, etc.
- Your account won’t get sent to collections if you do have trouble paying. Missing payments won’t do your credit score any good—it may even damage it further—but the bank can draw on the money in your account to get what you owe them.
- You’ll have money in an emergency. Even with good intentions, few of us ever manage to put money aside for an unexpected car repair or medical expense. You can use your secured credit card to cover the expense and then pay it off over time.
- Most banks pay interest on the money you deposit in the secured account. Unfortunately, interest on most accounts is pretty pitiful today, but over time you will make a few bucks to help you cover fees that you have to pay for your secured credit card account.
- Secured credit cards can be an expensive proposition. You may have to pay an application fee, a processing fee, an annual fee—and they can all mount up. (Then again, if it’s the only way you can get a credit card, it may be worth it to you.)
- If you don’t pay off your balance each month, you’ll usually pay higher interest rates than you would with a non-secured account simply because you’re considered a bigger credit risk.
- You have to come up with the money up front. It can be tough to find enough cash to open the secured credit card account when your budget is already stretched tight.
- The credit limits are low. That’s a good thing if overspending is a problem, but a bad thing if you have an auto repair bill of $900 and your credit limit is $500.
- There are some unscrupulous lenders ready to take advantage of people in your situation. Do a lot of investigation before you open a secured credit card account, or work with a financial institution that you’re familiar with.
- You could lose your deposit and damage your credit even further if you don’t make payments on time. Make sure that if you open a secured credit card you’re really ready to use credit responsibly.