What's the big deal about secured cards?
Erica Sandberg is a prominent personal finance authority and author of "Expecting Money: The Essential Financial Plan for New and Growing Families." She writes "Opening Credits," a weekly reader Q&A column about issues for people who are new to credit, for CreditCards.com.
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Dear Opening Credits,
Why do you like secured credit cards so much? You always say to get them, but they are worse for your credit than regular cards. Tell the truth. -- Travis
It's true, I am a swooning fan of secured credit cards! They are most certainly not bad for your credit rating. I'm not sure where you got that idea, but if you look at how they work and what their advantages are, I think you'll come to love them as I do. Sure there are drawbacks -- and I'll cover them -- but the fact is, they're a fantastic little banking invention.
Secured credit cards are just like unsecured credit cards, only they're collateralized by cash. Upon acceptance, the cardholder puts a fixed amount of money into a special savings account. Typically, the issuer sets the charging limit to that sum, but it can sometimes be higher. The issuer won't touch the deposit unless the cardholder runs up a balance and fails to pay it back. In that case, the cardholder would be in default, giving the issuer the right to claim what's legally due them.
Can you see the positive elements to this arrangement yet? If not, here's four clear ways secured cards can help people -- maybe even you.
They're fairly easy to obtain. Because the bank assumes so little lending risk, it's more apt to grant the account. That means that even if you have damaged or slim credit, you are in a decent position to qualify. Most of the time you just need a job.
- You're forced into saving money. I'm all for socking a bit of cash aside and keeping it there for a rainy day, but it can be difficult to do. It's so tempting to dip into those funds, even when you don't really need to. However if the cash is locked away like this, you can't spend every cent you have.
- If you make a mistake, it will be on a small scale. In general, the credit limits for these accounts is fairly low, so there's only so much trouble you can get into. There was a time, not so long ago, when many unsecured credit cards came with the ability to charge tens of thousands of dollars. I can't tell you how many deeply indebted people I spoke with who wished their limits had been smaller.
- You can build a credit history. With small but steady charges that you repay in full each time the bill comes in, you can create the type of reputation that other lenders will find attractive. The vast majority of issuers send secured card activity to the credit reporting bureaus. Eventually, you may want to buy a car or a home, and a proven track record of responsible borrowing will be instrumental in not just qualifying for a loan, but getting the best terms. You'll save buckets of money in future finance charges by showing everyone how reliable you are now.
So tell me: How these secured accounts are bad for credit? The only way I can think of is that (like any credit account), you can mismanage it. However, that wouldn't be the card or the issuer's fault, but the cardholder's.
As for the promised downsides, some secured cards do have annual fees that are on the high side, and the interest rates tend to be worse than those for their unsecured cousins. But show that you can charge like a pro with one and you can close it out, withdraw your deposit, then shop for the plastic that you like better.
Come on, admit it, you're warming up to the idea of secured credit cards too now, aren't you?
See related: Entrepreneurial and under 21? You'll need to build a credit record, Turned down for secured card. Now what?, Secured credit cards offer consumers a low-cost way to rebuild their credit
Erica Sandberg is a nationally renowned personal finance authority. She’s host of several financial web shows, and a frequent guest for media outlets such as Fox, Forbes, Nightly Business Report and NPR. Erica previously was affiliated with Consumer Credit Counseling Service and was KRON-TV’s on-air credit expert. Her book, "Expecting Money: The Essential Financial Plan for New and Growing Families," was published in 2008 by Kaplan Press.
Send your question to Erica.
Published: November 27, 2013