Q:  I am having trouble getting a credit card and am looking at getting a secured card of some kind. Is that a smart decision?

A: A credit card has almost become a necessity in today’s world, whether purchasing online, booking a hotel or plane reservation, or renting a car. But most importantly a credit card can help build a good credit rating. Of course, if you have never had credit or need to repair a poor credit history, your only choice might be a secured credit card. When you look for a credit card or secured card there are several things to consider.

The most important thing to remember about a secured card is that it requires a deposit as security and may have other fees associated with it like application fees, monthly or annual fees, higher interest rates, and usage fees. Secured cards require cash collateral deposits of between $200-$500 which then becomes your credit limit. Your monthly payment is still required on the secured card in addition to the card holding your deposit.

There may be a couple of better options available to you. My suggestion would be to check with your bank or credit union to see if they would offer you a credit card with a low limit.  If not, consider asking if they have a debit card that can function as a credit card. The card will function like a debit card in that it will automatically come out of your checking or savings account.  

You do need to tell the merchant at the time of purchase that you want to use it as credit. In addition, if the financial institution reports the card as a credit card to the credit bureaus it can improve your credit score. If you still need to pursue a secure card after talking to a couple of financial institutions, there are still some things to consider. Make sure you shop around and do some comparisons.

Ask yourself: What kind of fees are there? Avoid any card that has an application fee and compares the annual fee, any monthly or transaction fees, and interest rates. I have seen individuals who have applied for a secured card have their entire deposit (and credit limit) eaten up by fees before they ever used the card. Another important consideration for a secured card is whether the issuer reports to all three major credit bureaus.

If they don’t, the secured card will not help build up credit or your credit score. The card may be convenient for reservations or buying things online, but it doesn’t help build a good credit history. One last thought, regardless of the kind of card you end up with, use it sparingly and only as needed. Purchase a few things and pay off the card every month.  

Generally secured cards have higher annual fees and interest rates than unsecured cards. The goal is to become creditworthy enough to get a regular credit card.   

Need answers to your financial questions? Email Ken King, at [email protected]

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