Even though the
emergence of financial products like prepaid debit cards have made it easier to
get some of the ease and benefits of plastic, solid credit still matters. Try
to buy a house or a car and you’ll quickly learn how important it is. If you
have bad or no credit, you’ll be turned down for a loan or offered an ugly
interest rate.
This is where
secured credit cards come in. Secured cards are a bit like a bicycle with
training wheels – a tool to practice on and demonstrate your capacity to
operate something bigger, faster and potentially more dangerous. Unlike
unsecured credit cards, the secured variety typically requires a cash deposit
in order to establish a credit line. If you put down a $500 deposit, you’ll
have a credit limit of $500 (keep in mind that the money you put upfront is not
used to pay off monthly charges). This initial deposit is the bank’s way of
insuring that it doesn’t get burned if you do not pay your bills.
The best thing about
secured credit cards is that, in most cases, the issuer reports your repayment
behavior to the three main credit bureaus – TransUnion, Experian and Equifax. Translated, this means
that paying your bill on time and following the terms and conditions of the
card can, over time, boost your credit score. This makes a secured credit card
an extremely valuable tool if, and this can’t be emphasized strongly enough,
you are timely and consistent in paying your bill.
Still, there are red
flags to watch out for with secured cards. Start by making sure that any
secured card you consider will, in fact, report to the three main credit
bureaus. If they do not, and your goal is to establish good credit, you’re
wasting your time. Like any financial product, it is important to know that not
all secured cards are equal when it comes to fees. Shop around. While secured
cards generally have higher fees than unsecured ones, there can be big
differences in the interest rates, activation charges and account maintenance
fees. It’s also smart to know the card issuer’s policy regarding returning your
initial deposit when you close the account. Sometimes it can take a few days to
get your money back.
Be careful to avoid any
secured credit cards that do not have a payment grace period. If it does not,
that means you will pay interest on any charge you make from the moment your
card is swiped. “With no grace period, there is no way to avoid paying
interest,” says Amber Stubbs, editor of CardRatings.com. “With regular credit
cards you can avoid interest altogether if you pay your statement in full.”
Fortunately, the lack of a grace period is a rarity, although the Horizon Gold
Card is one that does this. Also watch out for limitations on how you can use
the card. The Horizon card, for instance, can only be used to make purchases on
a Horizon outlet store website.
None of these cautions are meant to scare you away from using
a secured credit card to rebuild your credit. But being aware of some of the
potential problems will allow you to safely ride your training wheel equipped
bike without falling into potholes or getting run off the road.
Source: Forbes.com