Secured Credit Cards Pros and Cons

Francine L. Huff
LoanBiz Columnist


People who have bad credit often have difficulty qualifying for credit cards. As a result, it can be easy to get caught up in secured credit card offers that promise easy credit. While some people may benefit from applying for these secured credit cards, it's important to understand exactly how they work.

Who Should Consider Secured Cards?

It's tough to complete many financial transactions without a credit card these days. While most businesses still accept cash, it can be difficult to use it for transactions that require large amounts of money such as airlines tickets, rental cars, and hotel stays. While people with bad credit may not have many options for getting credit, a secured credit card can be helpful.

What Is a Secured Credit Card?

Secured cards require borrowers to open a savings account as collateral for a line of credit. Unsecured credit cards don't require a savings account. Depending upon the lender, the amount required to open a secured credit card can be as low as a few hundred dollars, and the credit line will be either a percentage of the deposit or the full amount.

How Much Will It Cost?

Most secured credit cards require an annual fee, and some require application or program fees. Because many people with this type of card have bad credit, borrowers generally pay higher interest rates, so people who don't carry balances may benefit the most. Borrowers should also find out if they'll be required to pay for monthly credit insurance on a card. Not all credit cards are the same so it's important for people to shop around and compare all the terms and conditions of different offers.

Watch Out for Scams

Borrowers should be cautious about credit card companies that claim they can guarantee approval for a credit line. Ultimately, whether or not an individual qualifies for a card will depend upon their credit score and other financial information. When shopping for secured and unsecured credit cards people should avoid:

• Calling 900 numbers that charge for information about cards
• Companies that don't disclose the amount of application and processing fees
• Credit cards offered by credit repair companies.

Using a secured credit card wisely can help repair a person's poor credit. Over time, if borrowers handle their accounts responsibly, their lenders may increase their credit limits.

Source:
Federal Trade Commission

About the Author
Francine L. Huff is a freelance journalist and the author of The 25-Day Money Makeover for Women. She has appeared on a variety of TV and radio shows.