Who among us hasn’t needed a second chance? Or a first opportunity? For the millions of Americans who were battered by the Great Recession and came out of it with a tattered credit score, plus the legions of young people who haven’t had a chance to earn and spend money wisely, these are not abstract questions.
Even though the emergence of financial products like prepaid debit cards have made it easier to get some of the ease and benefits of plastic, solid credit still matters. Try to buy a house or a car and you’ll quickly learn how important it is. If you have bad or no credit, you’ll be turned down for a loan or offered an ugly interest rate.
This is where secured credit cards come in. Secured cards are a bit like a bicycle with training wheels – a tool to practice on and demonstrate your capacity to operate something bigger, faster and potentially more dangerous. Unlike unsecured credit cards, the secured variety typically requires a cash deposit in order to establish a credit line. If you put down a $500 deposit, you’ll have a credit limit of $500 (keep in mind that the money you put upfront is not used to pay off monthly charges). This initial deposit is the bank’s way of insuring that it doesn’t get burned if you do not pay your bills.
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The best thing about secured credit cards is that, in most cases, the issuer reports your repayment behavior to the three main credit bureaus – TransUnion, Experian and Equifax. Translated, this means that paying your bill on time and following the terms and conditions of the card can, over time, boost your credit score. This makes a secured credit card an extremely valuable tool if, and this can’t be emphasized strongly enough, you are timely and consistent in paying your bill.
Still, there are red flags to watch out for with secured cards. Start by making sure that any secured card you consider will, in fact, report to the three main credit bureaus. If they do not, and your goal is to establish good credit, you’re wasting your time. Like any financial product, it is important to know that not all secured cards are equal when it comes to fees. Shop around. While secured cards generally have higher fees than unsecured ones, there can be big differences in the interest rates, activation charges and account maintenance fees. It’s also smart to know the card issuer’s policy regarding returning your initial deposit when you close the account. Sometimes it can take a few days to get your money back.
Be careful to avoid any secured credit cards that do not have a payment grace period. If it does not, that means you will pay interest on any charge you make from the moment your card is swiped. “With no grace period, there is no way to avoid paying interest,” says Amber Stubbs, editor of CardRatings.com. “With regular credit cards you can avoid interest altogether if you pay your statement in full.” Fortunately, the lack of a grace period is a rarity, although the Horizon Gold Card is one that does this. Also watch out for limitations on how you can use the card. The Horizon card, for instance, can only be used to make purchases on a Horizon outlet store website.
None of these cautions are meant to scare you away from using a secured credit card to rebuild your credit. But being aware of some of the potential problems will allow you to safely ride your training wheel equipped bike without falling into potholes or getting run off the road.
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Curtis Arnold is a credit expert and co-founder of BestPrepaidDebitCards.com
