You may view credit cards as nothing more than another payment method. But in reality, these plastic cards play an important role in your credit history. They can help you establish a credit history, as well as build a high credit score. For many, credit cards were their introduction into the world of financing. But while credit cards are a part of life, getting your first account isn’t always easy.
Banks are cautious when you don’t have a prior credit history, and people with no credit are typically turned down for unsecured credit cards. Fortunately, this isn’t the only option available. Secured credit cards can get your foot in the door and provide you with the credit you need to build a strong FICO score. But before eagerly applying for a secured credit card, there are four questions you need to consider.
What is a secured credit card?
Like its name suggests, a secured credit card is a type of credit card that requires security. This security is a cash deposit paid directly to the bank that issues your card. The bank opens an interest-bearing account for your deposit and holds the money as collateral in the event of default. This cash deposit protects the bank until you demonstrate creditworthiness. By providing a security deposit, you’re eligible for a low-rate secured credit card minus the cosigner.
What type of cash deposit do I need?
The amount that you give your bank as a cash deposit is important because this amount reflects your credit limit on the card. Banks are reasonable and they do not require huge security deposits. There isn’t a flat acceptable amount, but the average minimum is between $250 and $500.
What are the fees?
There is no way to escape fees on a secured credit card, but you can opt out of offers that charge excessive fees. Do your research and know what you’re paying before applying for a credit card. Common fees may include an annual fee, a setup fee and a monthly maintenance fee. These fees are charged directly to your credit card, which can eat into your available balance. Contact your bank and inquire about secured credit card fees, and then contact a few other banks to compare fees.
Does the bank report to the three credit bureaus?
While the majority of banks that issue credit cards send monthly updates to the three major credit bureaus, this action isn’t required. Do not apply for a secured credit card unless you’re absolutely sure that the bank will update your credit report. You need positive information on your credit report – that’s the purpose of applying for a secured credit card. If the bank doesn’t report to the bureaus, your timely payments and solid credit habits will go unrecognized, and you won’t build a credit history or a high credit score. Some banks only report to one or two bureaus. This is better than nothing, but it’s always best to select a bank that reports to all three bureaus.