Best Secured Credit Cards - What To Watch For

Best Secured Credit Cards - What To Watch For

Before I tell you about which secured credit cards to look at and how to use them successfully, I want to give you some warning signs to watch out for. Just like any other business, the Secured Credit Card business has its share of scams and disreputable companies that are all trying to get you to choose thier secured credit card. A good general rule of thumb to always keep in mind, is that the harder a company tries to get you to pick their secured credit card, the more carefully you should scrutinize thier terms of service and policies.

Here are your options for choosing a secured credit card:

1. Your Bank or Credit Union. If you already have a bank account then you may want to make your bank your first stop. The upside of this is, that your bank is not usually out to screw you and you will probably get a decent rate. The downside is that sometimes these banks don't report, or they report as secured credit cards to the reporting agencies, which does help your credit score, but not nearly as much as a unsecured revolving line of credit being reported.

2. Established Secured Credit Card provider: There are many companies that offer secured credit cards, some of these companies offering the best secured credit cards out there. You'll want to check certain things before choosing, which we'll get to below, but these can be a much better choice than your bank in some cases, if you find the right one.

3. Fly-By-Night Secured Credit Card Companies: These are the companies that will generally send you unsolicited mail or email with letters that say something like: Dear So and So, you have been PRE APPROVED for a secured credit card with OUR COMPANY. Bla bla bla. If you can find one of these companies with no hidden fees and decent rates then you might consider this, but I would recommend skipping them altogether as you'll generally end up getting screwed.

Okay, so what should you look for when choosing the best secured credit card? Well, there are several things, and we'll list them in the priority that you should weigh the option, with number 1 being the most important.

1. They report to all three agencies and they report as a non-secured credit card: This is very important, not only for your credit score but also for lenders. First, the credit reporting agencies will raise your score quite a bit more for keeping up payments on an unsecured line of credit than with a secured credit card. As for lenders, most lender representatives don't know exactly how secured credit cards work, and when they view an entry that says 'Secured Card' they may think that it is simply a pre-paid debit card that reports. You put money on the card, spend it, and get a report for it. They may throw out this information altogether when making a decision. Simply ask the secured credit card company which bureaus it reports to, and how they report - as a secured credit card or not. You may find that some companies don't report to all three bureaus, and while you should strive to make sure that it is reported to all three, it is less important then finding someone who will report your secured credit card as an unsecured line of credit.

2. Find a company that doesn't require a huge "membership fee": Many companies will get you to sign up with a $300 deposit, and halfway through the application process they will tell you that your first month's credit limit will be used by the "application fee" or "membership fee" or whatever they are calling it. This is a huge mistake, because it basically means that you will be paying $300 for the card...twice. You'll pay the secured credit card deposit, and then you'll pay the application fee by the end of the month. Of course, if you can't afford that six hundred dollars upfront the first month, you will have to finance the balance, and you'll end up paying interest on it. You can find secured credit card companies that don't require a "application fee" at all, believe it or not. NOTE: Don't get the "membership fee" confused with the Annual Fee. The annual fee is charged by most lenders, even unsecured credit card issuers. This is perfectly acceptable as long as it is reasonable, which we'll get to below.

3. The Secured Credit Card's APR: People with bad credit expect to get an ridiculously high interest rate, around 20 percent, but it doesn't have to be this way. There are secured credit cards companies that have APR's as low as 8 or 10 percent, and you'll want to try to find one of those if you can. Of course, if you do it right you won't have to pay interest, but still, you'll want that safety net just in case.

4. The associated fees that come with the Secured Credit Card: You'll want to check the fees that are associated with your secured credit card before you proceed. Some of these include processing fees, monthly maintenance fees, automatic payment drafting fees, paying by phone fees or any type of fees associated with payments.

5. Annual Fee: This should be around $50. Look for out for annual fees that are really high and try to keep your annual fee at $50 a month or lower.

Next time, we'll get into a few things like how putting a larger deposit on your secured credit card will raise your credit faster, and how to use your secured credit card to build your credit and not hurt it.