You must put funds into an interest bearing savings account at the financial institution
which gives you the credit card. The savings
account serves as a security deposit for your line of credit. The required deposit
can range anywhere from a few hundred to a few thousand dollars depending upon
the type and amount of credit line offered.
Your line of credit represents a percentage of the amount you deposit. While the typical range is 50% to 100%, some financial institutions have gone as low as 40% (i.e., a $250 credit line with a $100 deposit). You may also have to pay application and processing fees; and an annual fee in subsequent years.
Make sure you understand the total amount of the fees you must pay.
Find out if any fees will be returned if you are turned down.
Secured cards generally charge higher interest rates than unsecured credit cards.
Federal actions:
Over the past few years the Federal Trade Commission has aggressively prosecuted companies that deceptively advertised major credit cards through television, newspapers and direct mail.
Most scams follow the same basic pattern :
You are guaranteed that you will get a credit card.
The ad is vague as to which type of card you are eligible for.
The ad fails to disclose the amounts required for the security deposit, application or processing fees, or the annual fee or APR.
The ad fails to disclose eligibility requirements such as income or age.
You are instructed to call a "900" number.
You will be charged (anywhere from $2 to $50) for simply making the call. And, in some cases you may just be asked for your name and address where they can send you an application. You may hear a list of banks offering secured credit cards. You may be instructed to call another "900" number at an additional charge to hear more information.
What you shouldn´t do:
Jump at the offer of guaranteed credit. Legitimate lenders only extend credit after a thorough review of your credit profile.
Call a "900" number to get a credit card. You may pay and never get the card.
Go after credit cards from companies offering to "repair" your credit. Trust us, the ultimate fees you pay will exceed what you should pay to get a credit card.
Can a secured card help to build, or rebuild your credit?
Only if the credit card issuer reports to a credit bureau. If the issuer does not report your payment history, you cannot build or rebuild a credit profile. It is also important to understand that even if the issuer does report to a credit bureau, some creditors do not look favorably on secured cards. In that case you must view the card as a convenience, not a credit enhancement tool.
What are your alternatives?
If you need a credit card but have either no credit history, or a negative credit history, one alternative is to ask a friend or relative to add you as either an additional, or joint user on their credit card.
If you are an additional user, they will be responsible for your debts, so don´t let them down. If you fail to pay, they will not only suffer the financial loss, their credit report will be negatively affected.
If you are a joint user, you will be responsible for both their debts and yours,
but you will also get the benefit of having their positive credit history reflected
on your credit report.
