With today’s difficult economy and with life events such as divorce and catastrophic health issues, many people have not been able to keep their finances afloat and as a result their credit scores reflect their struggles. Combine their poor credit history with our economy’s increasing reliance to transact business with plastic cards, those that are struggling with their finances feel like they are really in a tough spot. Just think about how difficult it is to rent a car, buy an airline ticket or simply order music online without having a credit card. Many people are turning to secured credit cards as a solution to their problem.
Secured credit cards, also referred to as prepaid credit cards can be a real benefit to those with poor credit history. The card gives them the ease of use of a plastic card while offering them the ability to rebuild their credit score. The downside is that many prepaid credit cards charge high fees and interest rates. In addition, not all prepaid credit cards will rebuild your credit score.
What is a secured credit card?
A prepaid or secured credit card is one in which the user must provide a security deposit prior to use. The credit limit on the card is typically equal to the amount of the deposit that was made. For example, if you opened a prepaid credit card account by depositing $500, you would have a credit limit of $500 dollars.
What should you look for when looking for a secured credit card?
Secured credit cards vary widely from one issuer to another. Here are some of the things you should ask:
- What are the application fees? The lower the fee, the better the deal for you.
- What is the interest rate charged on balances carried from month to month? In reality, you don’t want to carry a balance from month to month. However, you should look for lower interest rates, just in case.
- Are there monthly or annual fees? If so, look for low fees.
- What interest is being provided on your security deposit? The interest they offer you on your security deposit should be equivalent to the interest you would receive on a savings account.
- Which credit bureaus does the issuer report to? Look for an issuer that reports your credit activity to all three major credit bureaus.
- Do you have to buy an insurance policy or other services? Avoid applying for secured credit cards that try to bundle the card with other services that you don’t want.
- How long until I can convert to an unsecured credit card? Ask how many months of good payment history are required before you can obtain an unsecured credit card.
- Is the account reported as a secured account? If the issuer reports the credit card as being secured, it will have little to no impact on your credit score. You want to improve your credit score, so look for a card that is not reported to the credit bureaus as a secured card.
How should you use a secured credit card?
You can use a secured credit card just like any other plastic card, online, with a PIN or with a signature. However, you should always pay off the balance in full every month. Do not carry over a balance from one month to another. Instead, get in the habit of making small purchases and pay them off each month. This will show that you can handle the credit responsibly. The key to improving your credit score will be in the way you make your payments. Pay them on time and in full and you will see your credit score increase. If you don’t make timely payments or if you only make partial payments, you will not improve your credit score and may actually cause more harm.
What is the bottom line?
Think of a secured credit card as a temporary solution. Because of their very nature, you are being charged higher fees and interest rates than unsecured cards. In the end, a prepaid credit card will only improve your credit history if you use it responsibly. Properly using a prepaid credit card shows that you can handle an unsecured card. With your good payment history established, you will want to move on to an unsecured card as quickly as possible. Also, remember that all cards are not created equal, so shop around and find the best deal that you can.
Jana Castanon is the Community Outreach Coordinator for Apprisen. Apprisen is a member of the National Foundation for Credit Counseling.
Views expressed are the personal views of the author, and do not represent the views of the National Foundation for Credit Counseling, its employees, its members, or its clients.