Secured Credit Cards – Credit Cards & Useful Tools

When used correctly, secured credit cards can be very useful tools in establishing creditworthiness. You can use them to prove your ability to make timely payments, and ultimately get the benefits of being credit worthy. Here are 5 frequently asked questions:

What is a secured credit card? A secured card is a regular credit card, except that you have to give a “deposit” in order to be approved to make purchases. The amount of your deposit is your credit limit. Up to that limit you can make store purchases, online purchases, rent cars, book hotels, or do anything else that a credit card will allow you to do. You are also assigned an interest rate. When you make purchases, your minimum monthly payments will be based on that interest rate. You must make your monthly payments on time. If you do not make your payments, your card will be denied from making any other purchases. Your payment history may be reported to the credit bureaus, so make sure you establish a good payment record.

What will my credit limit be, and what fees will I have to pay? The deposit that you make will be kept in a savings account by the secured card issuer. Whatever amount you put into this account will determine your credit limit. Most times, your limit will be equal to your deposit, but over time if you make establish a good payment history, your limit may be increased without the need for another deposit. There are also other fees that you may be responsible for such as application fees, annual fees, and processing fees. All secured card issuers do not charge all fees at all times so be sure to read the fine print of your application before you apply.

Are there any benefits to my credit score? If you have never had a credit card, or have been denied one, a good first step in establishing creditworthiness with secured credit card. Assistant Professor of Economics at Austin Peay State University in Clarksville, TN, Jerry Plummer says, ‘A secured card is most useful for the person starting out on their credit history, since it says that the person is willing to take the extra step to establish credit.’ And since it is recognized that you are taking that extra step, many secured card issuers will report your monthly payments to the credit bureaus. This could be a good thing or a bad thing depending on how you make your payments. If you make sure to make all your payments on time, there could be great benefits to your credit score.

Can my credit limit be extended beyond my deposit amount? Most times, in the beginning your limit will be equal to your deposit amount. However, over time and with an excellent repayment history, your limit may be extended beyond your deposit amount. The length of excellent repayment history and the credit limit increase amount will depend on your card issuer.

Can I use my secured card to rent a car or book a hotel? Yes. Secured cards are very useful for transactions like these that require a credit card. Many hotels and car rental companies will not accept a debit or check card to make reservations, even if you intend to pay cash in full upon the completion of your trip or stay. Your secured card can be very handy as you are able to complete these kinds of transactions with it.

The formula for using secured credit cards as useful tools in building or rebuilding your credit is pretty basic. If you use your card in moderation, carry a balance less than your limit, make consecutive timely payments, and your card issuer reports your payment history to the credit bureaus, you can take advantage of acquiring a secured credit card. Building a good credit history when you have no credit now will put you on your way to showing creditworthiness in the future. For those that have bad credit as a result of poor payment habits in the past, secured cards help you demonstrate improved habits. It can be a win, win situation – if you make it so.

-Ken S.

© 2009

Leave a Reply

Your email address will not be published.