Yahoo Finance The Pros and Cons of a Secured Credit Card
Liana Moran's secured credit card story is becoming more common. After graduating from Georgia Southern University in May of 2014, she landed a paid internship and decided it was time to get a credit card. For starters, the apartment she wanted to rent required a credit check before she could sign a lease. So she applied for her first credit card and was quickly shot down.
"I naively thought no debt equals a decent credit score," says Moran, who ended up having one of her parents cosign her rental application.
Actually, Moran wasn't naive. A decade ago, before the recession, she would have easily nabbed her own credit card, credit history or not, but credit cards are harder to come by now for some recent college graduates, like Moran -- who went to school on scholarship. She says her friends who are paying off student loans have had no trouble applying for credit cards.
Moran decided to apply for a secured credit card with a limit of $300, meaning she had to fork over her own $300 before she was able to use it.
Secured credit cards, as you probably know, all work this way. You give your own money to the credit card company so that if you turn out to be undependable and don't make payments, the company has your cash and can make them for you. Otherwise, a secured credit card operates just as a credit card would, with interest and, if you don't pay it off in full every month, revolving debt.
Assuming you do make the payments on time, you'll begin to establish a good credit history, and eventually you'll get your money back and be able to get an unsecured credit card.
So is it smart to get a secured credit card? It may sound like a no brainer, but sometimes the answer is no and sometimes it's yes.
That's because anyone can make a strong argument for or against secured credit cards, in large part because they aren't all created equally, and because everyone has their own ideas about what's reasonable and unreasonable when it comes to money and debt. Only you can decide if it's smart or unwise to apply for a secured credit card. But if you're still unsure, let's examine the pros and cons.
The Pros
A secured credit card can help you establish a solid credit history. If you have a wretched credit history going back years and years, complete with bankruptcies and debts in collections, it's going to take you longer to establish that solid credit history than someone with no credit history, as you likely already know or can guess.
But if you have no credit history, and you're pretty responsible, you may find it doesn't take long for you to get into a credit card issuer's good graces. "In about six months, my credit score went from nonexistent to the 750's," Moran says. "Now my card is unsecured with a $2,000 spending limit."
But, no matter what your situation, a lousy credit score or none, "[the cards] can be lifesavers," says Kevin Gallegos, vice president of Phoenix operations for Freedom Financial Network, a debt relief service.
But there is a caveat: Not all secured credit cards report payments to the credit bureaus. Many do, but you need to make sure the one you're applying for does. If you get a secured credit card that doesn't report your credit history to the credit bureaus, your card -- for the purposes of building credit -- is useless.
A secured credit card can teach you how to use a credit card. That may sound like a condescending statement. You're an adult, after all. If you learned algebra or how to drive a car, you can learn to swipe some plastic into a machine. But, really, if you're new to the world of credit cards, why not start with a tool that shouldn't get you into much trouble? That is, provided you apply for a secured credit card that has a fairly low balance, such as $300 to $500.
That was something Moran (sort of) liked. She says that while she found $300 to be an annoyingly low spending limit, "on the flip side, it forced me to spend carefully."
What's more, if you have bad credit, and a secured credit card is the only thing you can successfully apply for, then it's hard to argue that you couldn't use a refresher course on credit cards.
The Cons
Some secured credit cards have many fees. Check carefully to see what fees you have to pay. The best secured credit cards have no or low annual fees (think: under $50). Of course, you may understandably feel that even a minuscule annual fee is unreasonable given that you have to fork over a deposit of $300, $500 or whatever spending limit you have. Moreover, generally your annual fee is taken out of that deposit, so if you have a $50 annual fee, and you put down a $300 deposit, your credit limit actually becomes $250.
It isn't only annual fees to be concerned about. For example: Are there fees for withdrawing cash from an ATM? How high are the late fees? If you buy something you don't have the money for, will there an insufficient fund fee -- and how much is it? Is there a balance transfer fee? Some cards even charge credit limit increase fees, so if you decide to fork over a larger deposit so your credit limit goes from, say, $300 to $500, you still get hit with a fee.
But plenty of secured credit cards do go easy on the fees. You just need to review the terms carefully.
You can still get into trouble with a secured credit card. It's not hard to develop a false sense of security with a secured card, especially if money is tight, and you can barely scrape up a few hundred dollars as a security deposit when applying. If you have a long track record of late and missed payments, it's still possible that you end up closing the account and getting phone calls from a debt collector.
Let's say you had a secured credit card with a limit of $300 and a 16.24 APR, and you carry a balance from month to month; eventually you max out and fall behind in your payments and then just stop paying the card. While your credit card will keep your $300 deposit, you still could owe the card issuer extra money on interest and fees. If you don't pay that, and it's reported, it'll eventually hurt your credit history.
Still, if things go south, with a low credit limit of $200 or $300 or maybe $500, you aren't likely to find yourself thousands of dollars in debt.
Few to no perks. A handful of secured credit cards do offer rewards programs, but most don't. "No ... cash back, miles, trips or any other incentives that traditional credit cards offer," laments Carlos Dias, Jr., founder of Excel Tax & Wealth Group in Lake Mary, Florida.
Still, while Dias says, "I have mixed feelings on secured credit cards," he concedes that secured credit cards can be a good start for people trying to establish or build up their credit.
In the end, secured credit cards are a little like staying at a mediocre vacation resort. It may be a nice place to visit for a short time, but you wouldn't want to live there.
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