Secured cards have higher rates and fees, but their terms vary, so it pays to comparison shop and ask questions
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People trying to rebuild their credit with secured credit cards should expect to pay more fees than regular cardholders, according to the 2011 CreditCards.com/Bankrate.com annual fee survey.
Unlike standard credit cards in the survey, which were almost exclusively annual-fee free, the majority of secured cards surveyed carried some type of annual fee.
|2011 Credit Card Fee Survey|
|A year after the Credit CARD Act’s major provisions went into effect, predictions of an onslaught of fees haven’t come true.|
Secured credit cards are “more likely to have some fees associated with the accounts just to offset some of the risks,” says Beth Robertson, director of payments research for Javelin Research, the Pleasanton, Calif.,-based card market consulting firm.
Rebuilding good credit
Secured card users are people who are either new to credit or who have had train wrecks with their credit and need a way to show future lenders they are again creditworthy. However, there’s a cost to rebuilding good credit — higher interest rates and higher fees for card-related services.
Applicants for these cards must deposit money into an account. Those funds are used as collateral to secure their borrowing. When they use the secured card to make purchases, they are essentially borrowing and paying back their own money. Credit counselors advise secured card users to make small purchases and pay off the entire balance on time each month to avoid interest charges and to show they are good credit risks.
The CreditCards.com/Bankrate.com annual fee survey tracks the amount of fees charged for various credit card related services by the 50 largest card-issuing banks and credit unions, based on credit card receivables. This was the first year that the survey, which was conducted in May 2011, included secured cards. Fifteen secured cards issued by large and small banks and credit unions were included in the review. There were 66 standard (unsecured) credit cards in the survey.
The survey found:
- Annual fees: Nearly all of the 66 standard credit cards (95 percent) in the survey carried no annual fees. By contrast, more than half of the secured cards (53 percent) did have annual fees that range from $18 to $40 a year. The most common was $29 a year.
- APRs: The average annual percentage rate (APR) on the cards was 17.46 percent with the highest at 23.99 percent. The national average for regular credit cards was 14.83 percent as of May 25, 2011, according to the CreditCards.com Weekly Rate Report.
- Application fees: None of the cards in the survey required application fees.
- Credit bureau reporting: All report monthly payment data to the three major credit bureaus.
- Minimum security deposit required: Seven of the 15 cards require minimum deposit amounts of $500. The minimum required ranged from a low of $49 up to $500. The highest maximum deposit allowed was $50,00.
- Credit limits: Nearly three out of four of the cards (73 percent) have credit limits that are equal to the amount on deposit.
- Interest on deposits: A majority of the cards (60 percent) pay interest on the amounts deposited. The annual percentage yield (APY) ranges from 0.05 percent to 1 percent. The most common APY is 0.1 percent. One card issued by Citibank, places the deposit into an 18-month CD.
If all goes well, secured card users should expect to graduate to an unsecured card before too long.
Chris Fichera, associate editor of Consumer Reports magazine, advises consumers to look for secured cards that offer the option of upgrading to standard unsecured credit cards after 12 to 18 months. Fifth Third Bank, for instance, reviews secured card accounts after 12 months and may offer customers unsecured cards afterward. Citibank also reviews accounts for possible upgrade after 18 months. “Ask about upgrading if they don’t offer it,” he says.
Other advice: “You want a card that doesn’t charge too steep an annual fee,” Fichera says, adding $30 is a good target.
“You want reporting to all three credit reporting agencies,” Fichera says. “You are building credit or repairing credit, so you want them to report to all three bureaus.”
Other fees to watch out for include fees to increase the credit limit on the card. “Some will charge quite considerable fees for credit limit increases,” Fichera says. “There’s lots of small fees that you might find in the small print, such as a monthly maintenance fee of $10 to $12.”
Fees limited by law
The Credit CARD Act of 2009 limits the amount of upfront fees credit card issuers can charge during the first year of an account to just 25 percent of the credit limit on the account. The laundry list of fees that were once piled on to cards for people with bad credit have disappeared. Says Fichera, “The majority of issuers set the fees just below the CARD Act limit.”
Several of the cards in the survey give account holders the option of closing their secured card accounts and getting refunds of their deposits either with a check or by depositing the money into a checking or savings account.
Fichera says consumers who don’t want to pay a lot in fees can look for other options to repair their credit. He adds: “If you can get somebody to co-sign for you or issue you a card on their account or piggyback on their credit, you can get the benefit of that without the fees.”