Q. After losing my job, my credit went to pot. I need to rebuild my credit and I’ve heard that secured cards can be a good way to go. What are your thoughts?
A. Secured credit cards can offer those with bad credit or no credit at all a way to build a good credit history. This unique type of credit line comes both with benefits and disadvantages. It is important to consider all of the options before applying for a secured line of credit.
A secured credit card is a line of credit issued to you after filling out an application and paying an initial deposit. The amount that you are required to put down may vary, but it is typically between $200 and $500. The amount of credit available issued on your new card is usually the amount of money that you deposited, though some credit card companies may issue a percentage above that amount to your available credit. For instance, your bank may issue a $300 line of credit for a $200 deposit.
“Gotchas” With Secured Cards
- Almost every secured credit card on the market charges an annual fee. In some cases, this fee can eat up most of your available credit, meaning that you will have to pay the deposit plus a fee of a few hundred dollars before you can ever begin to use the card. It is important to read the find print for any credit card before you apply. There are many lenders that take advantage of people with poor credit, so be leery of an offer that sounds too good to be true.
- Some companies that issue secured lines of credit do not report to the three major credit reporting agencies. If your credit card company does not report your timely credit card payments, your credit card will not help build a good credit history. Make sure that your credit card company reports monthly, and if they don’t, use a different company.
- The low credit limits usually associated with secured cards makes it crucial that you don’t charge much on your card. You need to keep your credit utilization levels below 25% of your limit. On a $200 card, this means you can only carry a balance of $50.
- Even if you pay on time, having an account flagged as secured will not help out your credit as much as an account that is reported as unsecured. Some credit card companies will report your account as secured – and they don’t have to do this. Do a Google search to find out how a credit card company is known to report.
Where to Get a Secured Card
You may be able to apply for your credit card through your bank or credit union. Your interest rates and annual fees may be lower if you choose a card through a “regular” bank or credit union instead of a credit card company that caters to people with bad credit. A talk with your personal banker can help you determine which type of credit card might work best for you.
Using Your New Card
Once you have received your secured line of credit, be sure to exercise caution when using it. You should make at least one small purchase every month so that you have a balance to pay. If you don’t use your card at all, there will be very little information to report to the credit bureaus. Spending too much every month will not show potential lenders that you are able to spend within your means.
If you prove that you are able to pay your bill on time every month, your credit card company may choose to increase your credit line or even refund your deposit. You may also be able to negotiate a lower interest rate after demonstrating that you are a responsible cardholder. This will be reflected in your credit score and history.