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Secured Credit Cards- Consumer Tips
By Amy Cooper-Arnold
Whether you have no credit or damaged credit, secured
credit cards are a good tool for building a good credit
history.
Several months ago Tom, a member of CreditBoards.com,
filed for a Chapter 7 Bankruptcy. Now he is in the process
of rebuilding his credit history. It's a task that is
not easy, but with patient persistence he is seeing
progress already. Daily he checks his credit score and
is slowly seeing improvement.
1 - In addition to correcting every mistake, even the
smallest ones, on his credit report, he is using a secured
credit card.
2 - This secured card is an important tool in the overall
process of building or rebuilding credit.
Who should consider a secured credit card?
Someone who has no credit history.
Someone with a damaged credit history.
What is a secured credit card?
Secured cards are credit cards opened with a deposit
into a savings account, money market or certificate
of deposit. The amount of deposit required varies from
card to card, but generally minimum amounts range from
$250 - $500. These funds are considered your security
and will even earn a little interest since they are
being held in a savings account. Your credit limit is
determined by the amount you deposit into the savings
account. Sometimes the limit will be for the full amount
of the deposit; other times it will be a percentage
of the total.
It is important to keep in mind that a secured card
is a credit card, not a debit card. If full payments
are not made each month, then interest is charged on
the outstanding balance. And the lending institution
uses the security money to pay off the debt only as
a last resort. Even though the card is secured, it is
still possible to damage credit.
What are the benefits of a secured credit card?
Establishing credit. If you have never had a credit
card, a good first step in establishing good credit
is applying for a secured credit card. Assistant Professor
of Economics at Austin Peay State University in Clarksville,
TN, Jerry Plummer says, "A secured card is most
useful for the person starting out on their credit history,
since it says that the person is willing to take the
extra step to establish credit."
Reestablishing credit. If your credit history is damaged,
you may only be able to qualify for a secured credit
card. Using this secured card appropriately and within
the set parameters will help rebuild your credit and
qualify you for an unsecured card. If you have had to
file for bankruptcy, however, you may not qualify until
it has been discharged.
Preset limit cannot be exceeded. If poor spending habits
were part of the cause for bad credit, then a secured
credit card will help keep spending in check.
Useful for transactions that require a credit card.
Hotels and car rentals require the use of a credit card.
If you don't qualify for an unsecured card but
you do for a secured card, then you are still able to
make the transaction.
What should I look for or avoid when shopping for a
secured credit card?
Fees. This is the area you will really want to research
when shopping for a secured credit card. Some cards
will come with fees that run into the hundreds of dollars,
eating away much of the credit you secured with the
savings account. Professor Plummer says a card with
no fee is the best, but a small one-time fee can be
okay. Annual fees for attractive secured cards typically
range from $20-$35. Be sure to watch out for hidden
fees such as "registration charges" and "setup
fees."
Interest Rate. Just because you have no or poor credit
doesn't mean you have to settle for the highest
interest rate. Interest rates for attractive secured
cards should not exceed 19%. Shop around and get the
most competitive rate available.
Read the fine print. Linda Tucker, Director of Education
for Consumer Credit Counseling Service for Arkansas
and Memphis, TN, stresses the importance of reading
the fine print. Doing so will let you know your exact
obligations to the issuing company: for example, the
grace period, what happens if you don't make a
full payment, and what fees are attached if you don't
make the full payment. Understanding these details will
help make sure you are not further damaging your credit.
Fraudulent Offers. As with unsecured cards you need
to watch out for fraudulent offers.The Federal Trade
Commission gives the following advice to protect yourself
from credit card fraud:
* Offers of easy credit. No one can guarantee to get
you credit. Before deciding whether to give you a credit
card, legitimate credit providers examine your credit
report.
* A call to a '900' number for a credit card. You pay
for calls with a '900' prefix -- and you may never receive
a credit card.
* Credit cards offered by "credit repair"
companies or "credit clinics." These businesses
also may offer to clean up your credit history for a
fee. However, you can correct genuine mistakes or outdated
information yourself by contacting credit bureaus directly.
Remember that only time and good credit habits will
restore your credit worthiness.
When will I qualify for an unsecured credit card?
It can take several months to see an improvement in
your credit history. Bankrate says it's a good
indicator when you start receiving flyers in the mail
for unsecured cards that your credit is improving. However,
it's a good idea to continue taking things slowly.
Using a secured card will help you learn healthy habits
so that when you do get an unsecured credit card you
remain in control of your spending and credit.
Where can I find a secured credit card?
Most companies don't advertise secured cards. But you
can visit the Card Reports section of http://www.CardRatings.com
to find out where and how to apply. Click on the link
entitled "Cards for Consumers with Poor or No Credit".
Other tips
Tom recommends sticking with only one or two cards and
keeping spending to a minimum. The goal is to pay the
card off each month.
Tucker emphasizes the importance of paying the amount
due each month; otherwise late fees can be charged,
interest rates raised, privileges lost, and credit history
negatively affected.
Make sure you are getting a credit card as opposed to
a gas card or a department store card.
Make sure a reputable bank or credit union, even a local
one, is issuing the card. And, don't automatically
assume a bank is issuing the card.
Not all issuers report to the three major credit agencies
(Experian, Equifax, and TransUnion). It's important
to get a card that does report to all three agencies;
otherwise you will be wasting your time. Fortunately,
secured cards normally report to the credit agencies
just like unsecured cards (you should verify this before
applying).
If you have filed for bankruptcy, you may need to wait
until it has been discharged before qualifying for a
secured card.
Get one only if you cannot get credit, since you have
no credit record; or if you have poor credit. Plummer
says, "Many companies will not even count them
as credit, such as automobile F&I (Finance and Insurance)
people, although they will not admit it." So, if you
don't really need a secured card, you will be doing
more harm than good.
Finally, whatever situation you are in, no credit or
poor credit, the best way to build good credit is to
set up a budget and then stick with it.
1 You can pay membership fees to any one of the three
credit bureaus - Experian, TransUnion, and Equifax-
to be able to check your credit score online daily.
Visit our Credit Information section for more details.
Tom recommends purchasing Microsoft Money 2004, which
comes with a one-year membership to Experian (value
of $99.00).
2 To find out more about correcting errors on your credit
report, read our article How to Correct Mixed or Split
Credit Reports.
About The Author
Amy Cooper-Arnold is a staff writer for http://www.CardRatings.com.
Amy has been employed in various accounting-related
positions. She will graduate this December from Austin
Peay State University with a degree in English.
Article Source: http://EzineArticles.com/ |
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