Secured Credit Cards: Navigating the Minefield & Building Back Your Credit

Secured credit cards are a necessary evil for those wishing to re-build credit after a financial calamity, like bankruptcy, job loss, or marrying the wrong person. They represent some of the worst credit card deals we’ve ever seen, but they are often times a vital stepping stone on the way to rebuilding credit.

Secured Credit Cards
Creative Commons License photo credit: roujo

Do not despair! We will walk you through (i) how secured credit cards work, (ii) whether a secured credit card is the right choice for you, (iii) choosing a secured credit card, and (iv) why the internet is a terrible place to look for the best secured credit card.

How does a secured credit card work?

Secured credit cards differ from regular credit cards and pre-paid debit cards, mainly because you have to “hand over the money” upfront, as collateral, before you’re allowed to spend any future money. Consider the money you’ve forked over as gone until you shut down the account – you will be charged interest on anything you don’t pay down each month, even if your balance is less than the upfront deposit!

A typical example: deposit $500 to receive a line of credit of $250 to $500. From there on out, your secured credit card behaves much like a normal credit card – if you spend $200, you owe the bank $200 that month, or else you will have to pay interest.

What’s the upside? Even the scummiest of secured credit card issuers typically report your line of credit and your balance to the big 3 credit agencies: Equifax, TransUnion, and Experian. This helps you rebuild your credit.

What’s the downside? Most secured cards have annual fees. Also, you can actually hurt your credit score by spending a big percentage of your credit line and not paying it off. The important number to watch is the ratio of your “balance” versus your “credit line”. It is good to keep this ratio under 30% to improve your credit score, even if it means keeping the balance less than $100 per month, with just a $300 credit line, and paying for everything else in cash.

Is a secured card right for me?

There are other options out there for people with bad credit. A pre-paid debit card gives you the benefits of direct deposit and check deposit for free, and does not require you to post a deposit upfront. However pre-paid debit cards do not report to credit agencies and can be loaded with all sorts of “screw you” transaction fees, monthly fees, and ATM fees (expect to pay at least $100 per year for regular use).

You should only sign up for a secured credit card if you are trying to rebuild your credit. If you cannot afford to post an amount equal to your desired credit line, or do not plan to pay off the card each month, you are probably better off with a pre-paid debit card or cash.

Choosing a secured card.

There are 2 major considerations when picking a secured card.

  • Does the card issuer report to the 3 credit agencies?
  • Does the card have low fees?

Make sure you get one that reports to the 3 major credit agencies. I’ve never come across one that does not, but make sure you ask nonetheless.

There are vast differences in fees. Some of the most egregious offers (generally internet banks you’ve never heard of) charge $10 per month in maintenance fees, with all sorts of other ATM & usage fees buried deep in the fine print. Generally speaking, avoid anything that ranks poorly on NerdWallet’s Pre-Approved Credit Cards page, which ranks cards by rewards minus fees.

There are two advantages to sticking with local credit unions or national banks you’ve heard of: (i) their fees are much lower, and (ii) you are more likely to get free ATM access, and (iii) you often get the option to switch to an un-secured credit card after 1-2 years of good behavior.

If you are lucky enough to be affiliated with the Department of Defense, or can easily marry or adopt someone who is, I recommend you  stop reading right now and get the Navy Federal Credit Union Rewards Secured card. It has no annual fee, and a 1% rewards rate!

Other consumer friendly options include Wells Fargo Secured Visa and Fifth Third Bank Secured MasterCard, which offer annual fees of $18 and $24 respectively. Basically, most of the major national banks involved with the financial meltdown can get you a secured card with an annual fee of less than $40.

The internet is a terrible place to look for the best secured card.

The worst card deals out there are the ones that pay websites big commissions to refer over traffic, so that the card issuer can gouge your eyes out with fees.

Secured card wall of shame (watch out for these “shockers” buried in the fine print):

1. New Millennium

  • $49 processing fee to open the account
  • $59 per year fee
  • The shocker: There is no grace period so you have to pay interest even if you pay off your card in full each month.

2. RushCard

  • $119.40 per year fee
  • The shocker: RushCard charges you $0.50 to check your balance at an ATM machine!

3. First Premier Bank Secured Visa

  • $95 application processing fee
  • $75 annual fee
  • The shocker: 23.9% APR!

Pre-paid card wall of shame (watch out for these “shockers” buried in the fine print):

1. Account Now

  • $119.40 per year fee
  • The shocker: $15.95 account closing fee.
  • Mini-shockers: $2.50 ATM fee. $1 ATM balance inquiry fee. $0.40 ATM decline fee. $2.95 Monthly statement fee (free online). $9.95 monthly maintenance fee.

2. Silver

  • $47.40 per year fee
  • The shocker: $14.95 card cancellation fee.
  • Mini-shockers: $9.95 activation fee. Additional $3.95 if card is inactive. $0.95 per use fee. $1.95 ATM fee. $0.95 ATM balance inquiry fee. $0.95 ATM balance inquiry decline fee. $2.95 per month paper statement fee. $4.95 card replacement fee. $1.95 per customer service call fee!

3. Vision

  • $83.40 per year fee
  • The shocker: You get charged an extra $4.95 per month for “inactivity”, which is triggered if you don’t spend $1000 in a month!
  • Mini-shockers: $9.95 activation fee. $1.95 ATM fee. $0.50 ATM balance inquiry fee. $0.95 ATM balance inquiry decline fee. $2.95 per month paper statement fee. $4.95 card replacement fee. $14.95 cancellation fee. $15 per month Umbrella protection service fee. And no, there’s no plain English explanation as to what an “Umbrella protection service” is…

Get your life back on track!

Legally, a bankruptcy can remain on your credit report for up to 10 years. Living on a cash only diet is fine if you don’t need to loan money for a car or house in the future, or can’t handle credit. Otherwise, it’s smart to get yourself back on track with a good secured credit card. But please, for the love of your wallet, read the fine print.

This is a guest post by Tim Chen, founder of NerdWallet.  His passion is educating consumers on the ins and outs of credit cards and helping them make better decisions on what cards to use and which ones to avoid.  Tim is not endorsed or affiliated with LPL Financial.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

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