A secured credit card is a real credit card, that is accepted everywhere a “regular” credit card is. You can use a secured card to order online, to rent a car or hotel room, or to pay for things in a store. The only difference between a secured card and a traditional card is that you need to make an initial deposit to “secure” your line of credit.
This deposit is held in a low interest savings account, and will be returned to you when you have either closed the account, or upgraded the card to a traditional, unsecured card. By making a deposit, you give the bank a safety net—if you default or don’t make your payments, they keep your deposit.
You still need to make monthly payments on your secured credit card. A secured credit card can be a great thing—it can help you rebuild your credit if you have had some financial trouble, or give you your first start if you have no credit history at all.
As great as a secured card is, whether you are using it as your first credit, or as a “second chance” at a good credit rating, there are some pitfalls you should be wary of when you decide to apply for a secured card:
- Application fees: The ideal card has no fees—you will already be making an upfront deposit, so you shouldn’t have to pay a set-up fee as well. Treat any application fees with a healthy dose of skepticism, and make sure that all of your deposit is truly going into a savings account. So, if you deposit $300, make sure that $150 of it isn’t going towards an application fee!
- High interest rates: Your secured card will have an interest rate attached, but try to avoid the ones with super high rates. You should also check your statement each month to be sure your rate hasn’t crept up while you were not paying attention.
- Maintenance fees: Read your statement carefully to be sure there are no additional monthly fees attached. Some low end secured card providers will charge a monthly service fee, simply for having an open account—and that fee is on top of the interest charges you will pay each month!
- Conversion: Make sure you have the option to convert your secured card to a traditional, unsecured card. If the bank you are applying with only offers secured cards, then there will be no way for you to upgrade to a “real” credit card after you have proven yourself to be credit worthy.
- Make sure you are not automatically signed up for additional services, like insurance or identity theft protection. These optional services may be tacked on automatically, and you will need to withdraw from them to avoid the substantial fees associated with them.
