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Our Pick: primor® Secured Mastercard Gold Card
Have little or poor credit? The primor® Secured Mastercard Gold Card has no minimum credit score requirements and no processing or application fees to worry about.
- Up to 25 days interest free
- Minimum Income Requirement of at least $100 higher than your monthly expenses p.a.
What is a secured credit card?
Most credit cards are granted solely on your credit history, income and a promise to repay what you purchase on the card. The credit card issuer doesn’t require any upfront payments before they will approve your credit card application. Even annual fees are billed to your account rather than being due before you can open the card.
A secured credit card, on the other hand, requires a security deposit to be made against the credit limit for the card. The credit limit is usually equal to the amount of the security deposit. If you make a $500 security deposit, for example, you will have a $500 credit limit.
Besides the security deposit, your secured credit card behaves just like a regular credit card. Your purchases are charged against the credit limit and you’re required to make at least the minimum payment each month. Your security deposit is held in case you default on your payments. As long as you pay as agreed, your security deposit will be returned to you.
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How secured credit cards work
The primary difference between a secured and unsecured credit card is a secured credit card requires an upfront security deposit as cash collateral. For example, you may need to deposit $200 in a separate account to access a credit line of $200 on your card. You cannot touch the $200 you deposited but you get back after you close your card.
Why does a secured card require a deposit? Some consumers have a tough time getting approved for a credit card because they’ve had past credit problems or haven’t established a credit history yet. In fact, 26 million Americans are “credit invisible,” meaning one out of every 10 Americans doesn’t have any credit history with the major credit bureaus. Credit card issuers want to be certain you’ll be timely with your balance payments – if you have no credit or bad credit, they can’t be certain – so a security deposit shifts some of the risk from the credit card issuer and offers collateral in case the cardholder defaults on the credit card agreement.
For the most part, applying for a secured credit card is much like applying for any other credit card. Along with your application, you must include the information for your security deposit – checking account number, bank routing number, and amount of the security deposit. Upon approval, the credit card issuer transfers funds for the security deposit into a savings account and opens your credit card account.
Purchases increase your credit card balance and lower your credit limit, leaving you with less credit available for purchases. Each month, you’re required to make at least the minimum payment on your credit card balance. Your security deposit is not used for making regular credit card payments.
Pros and cons of secured credit cards
Secured cards vs. subprime cards
Secured cards are designed for people with bad or no credit, they require a security deposit, and they allow you to qualify for a regular, unsecured credit card after a year or so of responsible use. You also get your security deposit back after paying off your card and closing your account.
Subprime cards differ from secured cards because they don’t require a security deposit. Yet they’re also targeted at people with poor credit, and to make money subprime cards are often rife with high fees and shady practices. They have a bad reputation for being predators or “fee harvesters,” and if you’re every comparing the two, you should almost always lean towards a secured credit card.
The 2009 CARD Act reined in the practices of subprime cards, requiring that fees be no more than 25% of the initial line of credit. If you have a subprime card with an initial credit of $300, the fees cannot be more than $75 (25%) the first year. This doesn’t stop some subprime issuers from skirting the law, and the CFPB continues to crack down on cards breaking the 25% rule.
Linda Sherry, the director of national priorities at Consumer Action, puts it simply: “Consumers are better off using a secured credit card than a subprime one even though it requires depositing money with a card company.” The bottom line is you should carefully consider all costs involved when getting a credit card, whether it’s secured or unsecured, and be extra mindful if you find yourself eyeing a subprime card.
5 simple ways secured cards help rebuild credit
It helps to think of secured credit cards as training wheels, a way to add a little stability to your credit habits while at the same time proving that you’re responsible and are following the right steps toward financial independence.
Below are five simple ways a secured card can help you repair your credit if used responsibly.
- Secured cards are a quick first step.
- Almost all secured cards report to credit bureaus.
- Getting one lowers your credit utilization ratio.
- Getting one also increases your total number of credit accounts.
- Secured cards help you build better financial habits.
Tips for using secured credit cards
Ideally, your secured credit card is only a stepping-stone to a better credit card. In the meantime, it’s important to use your secured credit card in a way that improves your credit score. Otherwise, it will take you longer than necessary to qualify for an unsecured credit card.
- Choose a secured credit card that reports to the major credit bureaus. A card that reports to all three major credit bureaus – Equifax, Experian and TransUnion – is best, but if the card only reports to one credit bureau, that’s OK as long as the rest of the terms are favorable.
- Always make your payments on time. Payment history is the most important factor affecting your credit score. It makes up 35% of your FICO score. Remember that you’re trying to rebuild a bad credit score. You can’t afford even a single late payment.
- Keep your balance at a reasonable level. The amount of debt you’re carrying is the second most important factor for your credit score – accounting for 30% of your credit score. The lower your balance, especially relative to your credit limit, the better. Aim to charge no more than 30% of your credit limit.
- Minimize any other applications for credit. Credit card issuers judge you based on the number of credit applications you make. Keep your secured credit card as your primary credit card for six months to a year so you build a positive credit history. Then consider applying for another credit card once you’ve begun to re-establish your credit.
How to choose a secured credit card
Choosing the right secured credit card is important for making sure you end up with a card that will help you rebuild your credit score. Once you’ve reviewed your options, follow these simple steps to applying for a secured card.
- Minimum security deposit. If you don’t have a lot of money to put toward a security deposit, you’ll want a secured credit card that will allow you to pay a low security deposit. You’ll be able to get a secured credit card without having to come up with a lot of money.
- Maximum security deposit. Perhaps you have several thousand dollars and want a secured credit card with a large credit limit. In this case, look for a secured credit card that requires a high security deposit. Many limit the security deposit to $5,000, but there are a few that allow security deposits as high as $10,000.
- Annual fee. Annual fees are common with secured credit cards. As you compare secured credit cards, look for one with a low or no annual fee. This will lower the cost of having a secured credit card.
- Interest rate. Ideally, you will pay your balance in full each month. This is the best way to build a good credit score and avoid getting into debt. If there’s a chance that you’ll carry a balance rather than pay in full each month, choose a secured credit card with a low interest rate. You’ll pay less in finance charges if you have a low interest rate.
- Reporting to the major credit bureaus. The goal of having a secured credit card is to build a new credit history or rebuild a bad credit history. Having a card that reports your account details to the major credit bureaus is a must. This way your payment history will be included in your credit report and will help improve your credit score.
- Upfront fees. The best secured credit cards do not charge any upfront fees. You’ll only have to pay your security deposit to receive your credit card. Tread carefully with any credit card that asks you to pay additional fees to get a credit card.
- The credit card issuer. Picking a secured credit card from a major credit card issuer is often a safe choice. Choose a secured credit card from a well-known, reputable credit card issuer to be sure you’re not falling for a scam.
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