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Secured Credit Cards

If you have a bad credit history or no credit history and want to establish your credit, consider applying for a secured credit card. Unsecured credit cards are not easily obtained for those with a blot on their credit rating or someone who hasn't established a credit history. Lenders are hesitant to take the chance on any person who doesn't have a flawless credit history.

A secured credit card looks identical to an unsecured credit card and usually offers the same security and charging privileges. The difference is that with a secured credit card you have to pay the credit card company a deposit of security that amounts to the same amount as your credit line. This assures the company that they will get their money back if you turn out to be a bad credit risk.

Secured credit cards work more or less like bank debit cards, except the money spent is not withdrawn immediately and the user makes payments monthly. They're also similar to 'prepaid' credit cards, in that money must be outlaid first. With prepaid cards, however, the cards are 'loaded' with any amount desired. Also, there are fees extracted every time the funds are input.

Some credit card companies may be willing to give you a limit that is a little above your security deposit. Others will only offer a limit that is lower than your security deposit. If you are considering a secured credit card, shop around to find out what your options are.

A secured credit card can be right for you...

• if your credit history is poor.

• if you have delinquent student loans

• if you are separated from your spouse who has a high debt ratio.

• if you have declared bankruptcy.

• if you've had a disruption in your employment or have recently started a new job.

A secured credit card does the following:

1. Helps you to establish credit if you do not have a credit history.

2. Helps you re-establish your credit if you have bad credit or have had to declare bankruptcy.

3. Offers security in times of emergency.

4. Gives you many of the same benefits as an unsecured credit card.

Disadvantages:

1. You have to make a security deposit, usually equal or more than your credit limit.

2. The funds you deposit are frozen until such time as your credit history is re-established.

3. You may not be reimbursed for the interest on your security deposit.

Of course, there's no free lunch associated with obtaining and using a secured card. Since the applicant is considered high risk, a higher APR is charged. That makes making monthly payments harder, which is usually what generated bad credit history originally.

To work around the dilemma, users should be sure, (for the first year, at least), to keep charged amounts low and make efforts to pay off almost all the amount due when the bill arrives. Notice 'almost all' because one of the most effective ways to build good credit history is to make payments on time and pay some interest. That raises your credit score quickly. If you use your secured credit card wisely, soon you'll be on the path to a good credit history.