Secure Your Credit Future: Get a Head Start with a Secured Credit Card
A secured credit card can be a starter kit for your financial life
By Nancy Munro
It’s hard to imagine these days, but Michael Jordan wasn’t always a great basketball player. After all, the future Hall of Famer didn’t even make his high school squad one year. Which is all to say that everyone, not just Michael Jordan, progresses in life from a mere novice to (we hope) some level of expertise and skill. All it takes is steady practice and determination.
The same could be said of our financial lives. Sometimes, we need to prove ourselves with one financial product before graduating to another that offers both more perks but also requires more responsibility – sort of like starting on the junior varsity team before making the jump to the varsity. That’s all a pretty apt way of describing the difference between so-called secured credit cards and the unsecured variety that most people are familiar with. As you’ll soon see, starting your financial life with a secured credit card can be just like getting a chance to play on the JV team while the varsity coach watches.
First off, how is a secured card different from a so-called regular credit card? Typical credit cards allow holders to essentially borrow money, up to a set credit limit. The money borrowed can be paid back each month or, more likely, over the course of many months or even years, all the while earning the card issuer a tidy amount of interest. A secured credit card functions quite differently. Issued by a bank or other financial institution, a secured card requires that a certain amount of money be placed in the account before the card is activated and used. The money placed in the account is exactly the amount available for use – there’s no credit limit over and above what you put in initially.
The reason secured credit cards function like this is pretty simple. There are plenty of people who have either no credit history or whose past use of credit cards has been shoddy enough that banks don’t want to give them another one. In other words, there are lots of people banks don’t want to lend money because there’s too high of a risk that they won’t get paid back. But that risk is eliminated with secured cards because users can only spend the money they fund the card with upfront.
Because of that low-risk structure (at least for the banks), secured credit cards are relatively easy to get. But unlike unsecured cards, which do not require a deposit to use, secured cards have a wide range of fees, charges for everything from applications to insurance. Take some time to comb through BestPrepaidCards.com to see which cards have the best and worst fees.
But here’s the good thing about a secured credit card. For those with either little or a checkered credit history, a secured credit card is a tool to prove that you can be trusted with the sort of credit limit a regular card offers. But you actually do have to prove that you can make timely payments on your secured credit card account.
But if you do that, will the coach – or, in this case, the three major credit bureaus who monitor repayments and hand out the all important credit scores that banks use to determine whether someone is a safe bet to offer a credit card – actually be watching? We checked with the three major credit bureaus, TransUnion, Experian and Equifax, and only Equifax responded to say that payments made on a secured credit card are treated the same way as those made on an unsecured card. But given the relative uniformity of the three bureaus’ policies, it’s likely that Experian and TransUnion also look kindly on responsible use of a secured credit card.
To improve or build a credit history with a secured card, here are some things you can do:
- Not all secured cards are equal. Shop around for the best (ie. lowest) fees possible.
- If possible, try to get a card from an issuer that also offers unsecured cards. With a good payment history, it’s likely they’ll eventually offer you an unsecured card. According to Bankrate.com, it will take diligent users of a secured card about a year before they’re offered an unsecured card.
- Once you get the card, use it a few times a month and pay the balance in full. In other words, prove that you know how to handle plastic.
- The secured card is not the finish line. The annual fees and other costs with a secured card mean you are spending your money to spend your own money. Use the card only until a better (unsecured) offer comes along.
- Don’t expect the same perks with secured cards as unsecured cards. Airline miles and other gifts and offers are not the norm when it comes to secured credit cards.