Bad Credit? What You Should Know About Secured Credit Cards

There are a lot of options for people with bad credit to be able to make purchases with a plastic card, and even rebuild credit while doing so.

Apr 13, 2014 at 10:45AM

Images

Having bad credit doesn't make it nearly as difficult to operate in a highly credit-based society as it has in the past. There are a lot of options for people with bad credit to be able to make purchases with a plastic card, and even rebuild credit while doing so.

Secured credit cards, also known as prepaid credit cards, offer the opportunity for consumers to make credit card purchases and begin improving their credit scores, but they can also have some potential pitfalls. Here are some things you should know about opening up a secured credit card.

How they work
A secured credit card is a line of credit based on a cash deposit, or collateral. For example, if the consumer opens up a $500 line of credit, he or she must put down a cash payment of $500 to secure future transactions. The issuing bank may offer cards with a fixed line of credit, or it may offer some ways to increase the credit line, including adding more cash to the initial deposit.

As the customer uses the card and makes regular and timely payments, the bank may report the activity to one or more of the three major credit reporting agencies, Equifax, Experian, and Trans Union. However, if the bank reports to the agency but shows the card as being secured, the activity may not count toward the credit score. It's important to talk to the credit card issuing bank to understand how they report to the agencies to know if a particular card will help in the credit-building process.

If a bank doesn't report card activity to any of the bureaus, or doesn't report in a way that will have a positive impact on credit score, then it really isn't worth it to have one when a debit card based on a bank account can be used in just about any situation credit is needed, and may not cost anything to use.

Timely payments matter
The cash that has been put down to secure the card can't be used as payment. Aside from the deposit, the card is similar to most other credit cards, so it is important to make payments on time.

Treat a secured card just like any other line of credit, and make payments on time and by paying more than the minimum payments. This puts the cardholder into good payment habits and the right mind-set for having a regular credit card. In other words, treat it like it isn't a secured card, not like a savings plan.

Know the terms of the deposit
The deposit made on a secured card may be required to kept by the bank for some time after the card is closed or upgraded to a regular unsecured line of credit. Because some charges may take a few billing cycles to be applied, such as foreign transactions, don't expect the deposit to be returned right away. Know the bank's terms before agreeing to the account.

Fees can be hefty
It can be very costly to use a secured credit card. Activation fees, interest fees, annual fees and other charges are generally much higher for secured cards than for unsecured cards to buyers with good credit. A $500 deposit could quickly translate to a credit line of $400 or less once the upfront fees are taken out.

savings account won't earn much interest, but won't have the big fees associated with it as a secured card will. It's crucial to understand the fees ahead of time and decide if it's really worth it to use it as a credit-building tool or if it is better to let time heal the bad credit wounds.

Your credit card may soon be completely worthless
The plastic in your wallet is about to go the way of the typewriter, the VCR, and the 8-track tape player. When it does, a handful of investors could stand to get very rich. You can join them -- but you must act now. An eye-opening new presentation reveals the full story on why your credit card is about to be worthless -- and highlights one little-known company sitting at the epicenter of an earth-shaking movement that could hand early investors the kind of profits we haven't seen since the dot-com days. Click here to watch this stunning video.

This article originally appeared on MyBankTracker.com.

Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Money to your ears - A great FREE investing resource for you

The best way to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as “binge-worthy finance.”

Feb 1, 2016 at 5:03PM

Whether we're in the midst of earnings season or riding out the market's lulls, you want to know the best strategies for your money.

And you'll want to go beyond the hype of screaming TV personalities, fear-mongering ads, and "analysis" from people who might have your email address ... but no track record of success.

In short, you want a voice of reason you can count on.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich," rated The Motley Fool as the #1 place online to get smarter about investing.

And one of the easiest, most enjoyable, most valuable ways to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as "binge-worthy finance."

Whether you make it part of your daily commute or you save up and listen to a handful of episodes for your 50-mile bike rides or long soaks in a bubble bath (or both!), the podcasts make sense of your money.

And unlike so many who want to make the subjects of personal finance and investing complicated and scary, our podcasts are clear, insightful, and (yes, it's true) fun.

Our free suite of podcasts

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. The show is also heard weekly on dozens of radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable. Rule Breaker Investing and Answers are timeless, so it's worth going back to and listening from the very start; the other three are focused more on today's events, so listen to the most recent first.

All are available for free at www.fool.com/podcasts.

If you're looking for a friendly voice ... with great advice on how to make the most of your money ... from a business with a lengthy track record of success ... in clear, compelling language ... I encourage you to give a listen to our free podcasts.

Head to www.fool.com/podcasts, give them a spin, and you can subscribe there (at iTunes, Stitcher, or our other partners) if you want to receive them regularly.

It's money to your ears.

 


Compare Brokers