Whether you’ve just turned 18 or you have bad credit, you may want to consider the best secured credit card to help you have a little extra money on hand for emergencies. Credit cards are well-known for being helpful when you find that you forgot to stop at the ATM, need gas or groceries and don’t have the money, or have a significant expense crop up.
In some cases, you’re searching for a secured card because you can’t get regular credit cards because of poor credit. While there are ways to improve your credit score over time, you may want a credit card right now. They can also help you boost your score because they are reported to the three credit bureaus. Those who have no credit must also work to build their credit report.
How It Works
Primarily, a secured card is one where you put some of your money on the card, and the lending institution matches that amount or gives you more than your amount, based on its rules and terms.
While these cards are everywhere, they aren’t made equally. The biggest challenge now is that secured cards look almost similar to subprime credit cards. The issuer doesn’t pay interest on the customer’s deposit, but it still charges high interest rates and levies more fees. To find the best one, you need to consider a few things.
The Best Secured Credit Card Reports Behavior
The only good reason to get and use a secured credit card is to establish credit history and build your credit score. However, some card issuers don’t even report your payments to the credit bureaus. Therefore, you should find out if the issuer does report to the bureaus and which ones it reports to. The issuer may only report a missed or late payment but doesn’t report if you’ve paid your bill on time. Therefore, the card can ding your credit score but doesn’t improve it.
Another good rule of thumb is to ensure that the item is a secured card and not a prepaid debit card. The product should be labeled as a secured credit card, and somewhere in the description, it should tell you that it builds credit.
Deposit and Credit Line
In the past, many secured cards allowed a small credit line, usually up to 150 percent of the deposit. Therefore, if you deposited $400, the credit line would be $600. Now, however, 100 percent of the deposit is the norm. Therefore, what you deposit is doubled, and that is your credit line. A good rule of thumb is to keep the credit line small, say up to $500 (so you deposit $250).
Even though you are putting your hard-earned money onto the card to, in a sense, buy a credit line, you still get charged fees. Make sure you know what the fees are and when they typically get charged.
In 2009, a new act was created that changed secured card rules and prohibits fees to exceed 25 percent of the deposit during the first year. Therefore, you should add up your activation, process, and annual fees (along with any others) to make sure they are less than 25 percent.
You should also consider the long-term goals. If you only want the card for a year, it’s better to be charged a one-time $20 activation fee than a monthly $5 fee.
Along with such, you should also consider what late fees are associated with the card. The deposit isn’t used against your balance; it’s held separately and is only touched if you default. You get that money back when you end the card as long as you’ve paid the bills on time.