If you have bad credit, you may have seen advertisements for cards designed just for people like you — secured cards. Unfortunately, not all those cards will give you the full credit-building benefits you need to start improving your credit history.
“Don’t go with the first offer that comes your way, be sure to shop around;” says Dave Jones, president of the Association of Independent Consumer Credit Counseling Agencies. “There are so many card offers online, even for people with bad credit. So take your time to get a good view of what the terms are on these cards, so you can find the best one for your needs.”
Here are five questions to ask while comparing secured cards to make sure the card you get eventually helps you graduate to a better one.
1. Is it really a secured card?
People who can’t get approved for regular credit cards generally have access to three similar types of plastic: prepaid cards, secured cards and what are called “hybrid” secured cards. In online credit card offers for people with bad credit, these types of cards are often lumped together, so be sure you know the difference.
Prepaid cards: These cards don’t give you access to credit. Instead, you simply spend the money you load onto the card. There is no monthly credit card bill to pay — you simply reload your own money onto the card when the balance reaches zero.
Secured cards: With a secured card, you deposit an initial amount to secure a credit line of the same amount. In all other ways, this card functions as a credit card; you get a monthly bill and have the option to pay the minimum payment due or the balance in full.
Hybrid secured cards. This is a somewhat new type of secured card pioneered by Capital One. It functions like other secured cards, except the card issuer may allow you to pay a lower security deposit to secure a higher credit line. Capital One’s Secured MasterCard, for example, lets you secure $200 with a $49 deposit.
What to do: Unlike secured or hybrid cards, prepaid cards won’t help build your credit. They can be useful if you need access to plastic to rent a car or book a flight. However, if part of your objective is to build credit, avoid prepaid cards. Go for either a secured card, or a hybrid secured card.
2. Does the card issuer report regularly to all three credit bureaus?
A secured card will start you down the road to building or rebuilding a good credit history because your credit behavior on the card is reported to the credit rating agencies. However, some small issuers do not report regularly to the three major credit bureaus (Equifax, Experian and TransUnion), so check before applying.
What to do: To build up your credit quickly, look for a card that reports activity monthly to the credit bureaus. At the same time, keep in mind that regular credit reporting is a double-edged sword. If you have a late payment or some other type of default one month, it will show up on your credit report, so stay current with your payments. If you can’t pay in full each month, don’t run balances over 30 percent of the credit limit, either, as that will also hurt your debt-to-credit limit ratio..
3. What is the APR?
Purchase APRs on secured cards range from around 23 percent to a whopping 36 percent on purchases. For the latter, you’d be paying more than one-third of the balance a year in interest charges alone if you do not pay off the entire balance before interest accrues.
What to do: Spend a few minutes checking the purchase APRs on any cards you’re considering. If you ever carry a balance, this will really pay off over the long run if you choose a card with a low and reasonable interest rate.
4. What are the fees?
The Credit CARD Act stipulates that the opening fees on credit cards can’t exceed 25 percent of the initial credit limit. In theory, that would be a total of $75 in fees for a credit card with a $300 credit limit. The fee cap was intended to prevent issuers from “fee harvesting” when extending cards to people with bad credit and few choices.
However, some issuers of secured cards have found ways to pile on other charges, such as “processing fees.” Because these fees are charged for application (before the card is opened), the fee cap does not apply.
What to do: Be sure you understand the fees your card will charge — annual fees, processing fees, monthly servicing fees, cash advance fees, late fees and over-limit fees.
“With multiple fees, it’s hard to see what the true cost of the card is,” Jones says. “Read over all the fees and total them up, so you know the real costs of the card before applying.”
5. How often does the card get reviewed for credit line increases?
Some card issuers automatically review your card on a regular basis to determine whether your responsible repayment behavior makes you eligible for a credit line increase. It is to your advantage to choose a card that helps you grow your credit line faster.
What to do: If the credit card terms don’t say how often the card is reviewed for credit limit increases, call the card issuer to ask. Also, check if there is a fee associated with credit line increases.
A final note
With their low limits and many fees, secured cards might seem like an inconvenience. However, remember that these cards serve you in repairing your credit and building up a strong credit history. Until you can get a better card, use your secured card as a tool for learning good credit management skills. Always pay on time, always keep balances below 30 percent of the credit limit and stick to small purchases so that you can pay off the card in full every month.