Secured credit cards are one option for people with limited credit histories or high-risk credit profiles who are looking to expand their credit standing. Secured credit cards may help you build a record of responsible credit use, but to ensure you’re getting the best deal, here are 10 questions you might ask before applying for any particular card.
1) What Are the Basic Terms?
The basic terms of the credit agreement are just as important with a secured card as with a non-secured card. Compare the interest rates charged by competing cards, and check how long the “grace period” is (how many days you have before the card issuer starts charging you interest on new purchases). Also look for an explanation of how your minimum payment will be calculated.
2) What’s the Required Deposit?
With a secured credit card, you place a security deposit with the card issuer. That deposit acts as collateral; if you fail to make your required payments, the card issuer takes money from the deposit. Ask the card issuer how large of a deposit you’re required to make. Minimums in the $200-to-$500 range are common.
3) What’s My Credit Line?
Your credit line — the maximum you can owe at any one time — depends on your deposit and your lender. The credit line is often equal to the deposit itself: A $300 deposit, for example, gets you a $300 credit line. But you may be able to get a line greater than your deposit, such as 150 to 200 percent of your deposit.
4) Can My Line Increase?
Ask the card issuer whether establishing a record of responsible use will allow you to increase your credit line without increasing your deposit. For example, if your initial credit line is equal to 100 percent of your deposit, the issuer may allow you to increase that to 200 percent after a year. Be aware that the issuer may not bump you up automatically even if you qualify; you may have to request it.
5) Is the Deposit Charged to the Card?
Some card issuers actually charge your security deposit to the card itself. This allows them to advertise that they offer secured credit cards with “no upfront payment.” The problem is that you may wind up with a credit card that you can’t really use until you pay off the deposit.
6) What Fees Are Involved?
Ask the card issuer for a comprehensive list of all fees that apply. Most secured credit cards charge an annual fee as well as penalties for late payments. Some also pile on additional fees for “processing” or simply for using the card.
7) How Do I Graduate?
Check with the credit lender you’re considering to determine if the lender allows for “graduation” — and look carefully at the terms of the card you’d be graduating to. Ultimately one of the most important factors that impact your credit score is your ability to pay bills on time. If you’re practicing good credit habits, you’ll want to know if you can be rewarded from your lender for your good behavior.
8) Are Payments Reported?
If you’re making your payments on time, you should want to have that good credit behavior to appear on your credit report. Check whether the card issuer will report your payment activity toany or all of the threecredit reporting companies.
9) Is the Minimum Payment Enough?
Credit card holders of all types — secured and unsecured — can fall into a trap if the minimum monthly payment required by the card issuer isn’t a largeenough amount. Ask whether the formula used to calculate your minimum payment ensures that you will pay off some of your principal (the money you actually owe) each month, rather than just the interest. Your monthly statement should also include how long it will take to pay off the balance if you only make the minimum payments with your interest calculated.
10) Will I Earn Interest?
Ask your credit card issuer if you can possibly earn interest on your security deposit.This isn’t a very common practice but there are some credit card lenders that offer this incentive. It may not be much, perhaps just a few cents a month. But that’s still your money that the issuer is holding. Getting interest on it is a sign that you’re being treated like a valued customer.
About the Author
Cam Merritt has been a professional writer and editor since 1992, specializing in articles about spectator sports, personal finance and law. He has contributed to “USA Today,” “The Des Moines Register” and the “Better Homes and Gardens” family of magazines and websites. Merritt has a Bachelor of Arts in journalism from Drake University.
This article is provided for general guidance and information. It is not intended as, nor should it be construed to be, legal, financial or other professional advice. Please consult with your attorney or financial advisor to discuss any legal or financial issues involved with credit decisions.
Published by permission from ConsumerInfo.com, Inc. © 2013 ConsumerInfo.com, Inc. All rights reserved.