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Archive for March, 2009

Banks That Offer Secured Credit Cards: Building Or Repairing Your Credit With A Secured Credit Card

Sometimes we face difficult financial circumstances that have devastating circumstances. Most of the time, going through a period of your life where money is hard to come by gets reflected first and foremost in your credit score, in a negative way. Once you have bad credit, a lot of things become harder. You can hardly qualify for loans and/or credit cards, and when you can, it’s at interest rates that are ridiculously high. Often, the situation is compounded by the fact that you can’t get regular checking accounts and have to settle for fresh start checking accounts that are restrictive and expensive to maintain.

The main problem is that if you want to improve your credit rating, you find yourself in a catch-22 situation because not only do you need credit to get credit, you also need credit to improve your credit. Your poor credit history becomes a real drag, as lending agencies and potential creditors are reluctant to give you the slightest opportunity to reestablish your credit.

One of your best options for breaking this cycle is to get a secured credit card. We’re going to explain what to look for when shopping for banks that offer secured credit cards and what to avoid.

What’s a secured credit card?

The practices of the credit card industry often cause credit cards to get negative press coverage, but that doesn’t mean that they don’t have their own advantages. For most people, it is the first access to credit, and the first way for them to build a record that may later on make it easier for them to get other types of credit, namely car loans, home loans, and personal loans just to name a few.

If, for whatever reason, you’re not eligible for a conventional credit card, you have the option of getting a secured card instead. Physically, a secured credit card looks exactly the same as a standard credit card, and works under the exact same principles, with one major exception. Your card is backed by money that you deposit and keep in a bank account, meaning that the deposit is counted against your card’s limit, and can be used by the creditor to cover your debt in case you default on the payments.

How secured credit cards work

As previously said, the first requirement for getting a secured credit card is to deposit money into a savings account (the absolute low required minimum is $100, although some banks require up to $500). Those funds are pledged (frozen) for as long as you hold the card, as a security for the financial institution that issued the card. Some banks will pay you interest on the account, while others won’t.

Most banks that issue secured credit cards will fix your limit at a level that goes from 50% to 100% of the amount that you have given as collateral. For example, if you’ve given a $1,000 collateral, the credit limit on your secured credit card will, in most cases, be between $500 and $1,000. A small number of banks that offer credit cards will grant you a line of credit that exceeds the amount of your collateral, resulting in you holding sort of a hybrid credit card where one part is secured and another part is unsecured.

In many cases, your credit limit may be increased, without you having to make additional deposits, after you have shown several months of paying your bill on time. That usually takes a year.

Requirements for getting a secured card from a bank or other financial institution

Depending on the financial institution (bank, credit union, or other), the requirements vary. In some instances the card is easy to get as long as you have funds to give as collateral. Other companies are a lot more stringent and look past your deposit, paying a lot of attention to your income and past credit history. Call the financial institution that you’re considering, and ask them what their policy is, or visit their website to see what their requirements are. Depending on your particular circumstances, you will find that some companies are a better fit for you than others. For example, some will not work with applicants that just filed bankruptcy, while others will not issue you a secured card (even if you have a substantial deposit) if you are unemployed.

In any case, when you’re applying for a secured credit card, you should have the following documentation at the ready:

• Social Security Number
• Proof of income
• Home phone number
• Employment verification
• Address verification

Comparison shopping when looking for secured credit cards

Hundreds (if not thousands) of financial institutions, most notoriously banks and credit unions, offer secured credit cards, and you can visit your local branch to apply for one. Many also offer secured credit cards online, with easy-to-fill forms and quick decisions. Since they are legally required to disclose their terms and conditions, comparison shopping is a snap.

What to look out for when looking to repair your credit with a secured credit card

• Annual percentage rate (APR). The APR on your credit card is the main factor that determines how much interest you will pay on your balance. Because of their nature and the demographics that they cater to, secured credit cards have very high APRs in the 20%-30% range.
• Annual fees. Almost all secured credit cards have annual fees. Your best bet is to just look for the card with the lowest APR & annual fees. Some issuers charge a monthly fee instead of an annual one; add them up so you can make an apples-to-apples comparison.
• Application fees. These can turn out to be pretty high (as much as $250), and they usually are charged to your first statement. Try and avoid having to pay those, since you will find quite a few secured cards that don’t charge application fees. Plus, if you happened to sign up for one that does, and then you find a better deal with one that doesn’t, federal law requires that some of these fees be refunded to you if you cancel within a reasonable time period (usually a few days).
• Late and over-the-limit fees. Sending your payment in late will both hurt your credit (which is a scary thought considering that bad credit is what got you to apply for a secured credit card in the first place) and cost you a late fee of up to $35. The same thing happens when you exceed your credit limit: your credit score is negatively affected because you use a very high percentage of your available credit, and you’re hit with an over-the limit fee. By the way, it’s erroneous to assume that the card will stop working once it’s maxed out. That is not necessarily true, and keep in mind that you’re keep getting charged an over-the-limit fee every month until you bring your balance under your credit limit.
• Penalty rates (default rates). One late payment is all it takes for most credit card issuers (including secured ones) to increase your APR by 10 percentage points or more. Try not to let this happen to you, because it will take up to a year of “good behavior” before the APR is lowered again.
• Grace period. The grace period is the time between the close of the billing cycle and the payment due date, and is usually at least 20 days. During the grace period, no interest accrues on your card account unless you have an outstanding balance or cash advances. You will find that some secured credit cards have no grace period, meaning that your purchases start accruing interest from the day they are made.
• Credit reporting. This is the last but not the least thing you should check. In order to truly reap the benefits from the whole secured credit card process, you need to make sure that the issuer reports to all three major credit bureaus. Those reports of on-time payments will help you rebuild your credit a lot faster.

Banks That Offer Secured Credit Cards: Building Or Repairing Your Credit With A Secured Credit Card

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