One of the ways that you can rebuild your credit is with a secured credit card. Using a secured credit card can help you establish a better financial reputation if you have made a few mistakes, or even if you don’t have enough of a credit history for an unsecured credit card.
However, secured credit cards often get a bad rap. This is because there are several issuers that basically gouge you in order to make money off the fact that you have poor credit. These credit issuers offer very low credit limits, charge a number of high fees, and may require ridiculous security deposits.
The good news is that not all secured credit cards fall into this category. Before you jump at the first secured credit card offer you receive, consider the following qualities of better secured credit cards:
Reasonable Security Deposit
Some of the worst secured cards require a $300 security deposit, but only offer a credit limit of $250. At the very least, look for secured card, like the US Bank Secured Visa, that will give you a credit limit that equals your deposit, up to $5,000. Many of the worst secured cards won’t even let you get a credit limit of $5,000, no matter what your security deposit is. Plus, the US Bank Secured Visa will keep your deposit in an interest-bearing account.
Another decent choice is the Capital One Secured Card. In fact, if your poor credit is at the upper end of the “bad credit” range, you can get away with a lower security deposit. In fact, you can get a $300 credit limit with a security deposit of $49 or $99 in some cases. (Of course, if your credit is truly atrocious, Capital One will require a security deposit of $200).
Low Setup and Annual Fees
Another consideration is the setup fees and other fees. Many of the best secured credit cards don’t offer setup fees. The Digital Federal Credit Union secured credit card does require that you make a $10 donation to Reach Out for Schools if you want to join the credit union and apply for its card, but that’s a low cost to pay for a secured card — especially since there is no annual fee.
The US Bank Secured Visa and the Capital One Secured cards don’t have setup fees, and their annual fees are reasonable, at $35 and $29, respectively.
Many secured cards will charge setup fees ranging from $25 to $100, and then charge annual fees of between $35 and $75 on top of it. With some cards, you can have half of your credit limit used up just in the initial fees you pay. Stay away from cards that are excessively expensive, since you will end up paying interest on all those fees as well — especially if you get a card that doesn’t offer a grace period.
Finally, make sure you pay attention to the interest rate. Many secured credit cards charge up to 29.99% APR — or more in some cases. There are even cards that charge 35.99% APR. The best secured credit cards have relatively low rates. The Digital Federal Credit Union Secured card is one of the best deals, with a rate of 11.50%, and no cash advance fee or higher interest rate for cash advances. In fact, it’s a fairly decent credit card even by non-secured card standards.
More likely, though, you’ll pay between 18.99% and 25.99% APR when you get a secured credit card. This isn’t too bad, as long as you pay off your balance each month. Watch out, though! Some secured cards start charging interest immediately, with no grace period. If possible, get a card with a grace period so that you aren’t charged interest as soon as you make a purchase.
With a little research, it’s possible to find a secured credit card that will get the job done, and not charge you an arm and a leg.