Secured Credit Cards: Costly, but They Can Help Those With Bad Credit
Feb 06 '02
The Bottom Line Secured credit cards have high interest rates, high annual fees, and require a cash deposit. They can be helpful, though, to those with a bad credit rating.
Offers from credit card companies are a common occurrence and most of us receive several letters in the mail each week to sign up for a new card. We also get offers in our e-mail; pop- up offers in web sites; advertisements in magazines; etc., to entice each one of us to sign up for a new credit card.
Most of us have good credit that we have established and maintained for a long period of time. As a result, we usually get good offers to sign up for more credit, with reasonable offers that include low interest rates and no annual fees. But for those who do not have a solid credit history, or who have not had the opportunity to establish credit yet, there is another type of credit card that you might be forced to accept, in order to build up your credit rating. It’s called a secured credit card. Let’s take a look at the specifics of this type of credit card:
How is a Secured Card Different From a Regular Card?
Just like its name suggests, a secured card is different from a standard credit card by the fact that it requires the cardholder to secure the credit. In other words, a secured credit card will require that the cardholder deposit an amount of money as a back- up to the credit limit on the card. This amount is usually equal to the full amount of the credit limit, but it can sometimes be less.
The reason that a secured card requires a balance deposit is because this type of card is considered high risk. Secured cards are given to individuals with bad credit ratings and/or individuals who have an insufficient credit rating to get a standard credit card. To compensate for the added risk, the issuer will require that a deposit be made, to “secure” the card from default.
As an example, let’s say that a person has declared bankruptcy and is now slowly rebuilding his/her credit history. Due to the bankruptcy, this person will not likely be able to obtain a standard credit card for several years. In the meantime, this person can help re-establish credit by obtaining a secured card. The credit limit will likely be set at a low level- perhaps only $1,000 or less, and the cardholder will be required to deposit $1,000 with the card issuer before the agreement will be complete.
What are the Interest Rates and Fees?:
Since secured cards are considered high risk, the interest rates and annual fees are usually much higher than other cards. You can expect to pay an annual fee of at least $50 and an interest rate of 20 percent or more, with a secured card. Even though the issuer has protected itself by requiring that a deposit be made, it will still attach higher than normal interest rates and higher than average annual fees to a secured card, because of the added risk.
If a cardholder makes a good effort to use the card responsibly and make timely payments, he/she can negotiate with the issuer to change the terms and conditions. The issuer could then reduce the annual interest rate, reduce the required deposit amount, or make a combination of changes that favor the cardholder, provided that the payments have been made on a regular basis.
Final Thoughts:
Secured credit cards have several negative aspects that make them unattractive to most people. Generally, they are something that most individuals should avoid whenever possible. Interest rates and fees are high, and a deposit of cash is required before the card will be activated.
Most people do not need to resort to getting a secured credit card. They are really meant for people with severely damaged credit or for those who have insufficient credit to get a standard credit card. They can help these individuals establish credit.
Some people with damaged credit might not have the necessary cash to get a secured card. If this is the case, you might be forced to forego credit cards completely, until your credit rating has been repaired.
Even though secured credit cards are costly (in terms of interest and fees) and have many stringent requirements, it’s important to remember that these cards are intended for individuals who need to improve their credit ratings. They are targeted toward people who need the forced discipline in order to improve their credit. If you fit into this category, then it might be wise to go ahead and accept a secured credit card. It can help you to repair a bad credit rating and give you the security of having a credit card, in times of emergency need.
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