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Secured Credit Cards

May 21, 2008  |  Difficulty: Easy

Whether you use them regularly or just now and then, everyone needs a credit card.  These days, you can’t even make a hotel reservation without a credit card.  However, what card you have and how you use it are important factors in the life of your credit history. 

For those with poor credit history, secured credit cards offer options to get the credit they need as well as help repair and rebuild their credit history.  Secured credit cards require some sort of collateral deposit that becomes the credit line for the account.  For example, you can deposit from $300 to $500 into the account.  Your credit limit will be that amount, or a certain percentage higher.  Over time, you are able to deposit more money toward your credit limit or the company may increase your limit based on timely payments.

While secured credit cards offer individuals with poor or no credit history the chance to get a credit card, users should choose with care.  There are an unfortunate number of scams out there aimed at taking advantage of users.  Read below for advice on how to avoid scams and choose wisely.

Catalog clubs disguised as ‘credit cards’

This type of scam advertises credit card offers to help rebuild bad credit history, but requires users to make purchases from their catalog.  The products included in the catalog are often overpriced.  Another downfall is that users cannot use this credit card anywhere else.  The catalog company will report your credit use and payment history to the credit bureau to help repair poor credit, but it is an expensive way to improve a bad situation.

Prepaid ‘credit cards’

As you may suspect, prepaid credit cards are not really credit cards.  While they may display the Visa or MasterCard logo, they are actually more like a debit card but without a bank account.  Users “load” money onto the card.  When purchases are made, the amount is deducted from the pre-loaded balance.  When the amount reaches zero, the user is no longer able to use the card.  These card companies do not report to the credit bureau, so it does nothing for your credit history.

Secured credit cards

Secured credit cards are the best option for people with bad credit and can’t get approved for a normal credit card.  Credit is issued based on an amount of money the user deposits into the card company’s bank.  Your credit limit is generally the amount of your deposit, but may increase over time if you make timely payments.  If you are a good customer, the company may increase your credit limit to 150% to 200% of your security deposit.

Unlike the prepaid credit card we discussed above where you are spending your own money, using a secured credit card does help improve your credit history.  Your deposit amount will only be deducted if you default on a payment. 

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