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Facts about Secured Credit Cards

Credit Card Types

Credit cards are a convenience that many Americans have come to appreciate. However, given the financial crisis and the looming recession, many once credit-worthy Americans are now struggling to re-build their credit after difficult financial times sidelined their credit score and their ability to obtain credit.

For those of us who are struggling with our credit worthiness, secured credit cards may be the answer. It is important, however, to educate ourselves on both the advantages and disadvantages of secured credit cards before applying for one.

How Secured Credit Cards Work

A secured credit card is essentially a credit card with a security deposit. The credit card works in a similar manner to a traditional credit card; however, the credit card holder must first deposit money into a special account that is equal to 50 to 150 percent of the card’s credit limit.

The credit card holder then uses the credit card as he or she would any standard credit card, and pays the bill in a similar fashion. The only difference is that the creditor has a cash reserve to pay the credit card should the cardholder default.

As the cardholder continues to pay the card every month and make responsible purchases, the creditor may raise his or her credit limit. For cardholders seeking a higher credit limit, the creditor simply requests a larger security deposit.

Establish and Spruce up your Credit Rating

For those consumers with little or no credit, or for those with a poor credit history, a secured credit card may be the ideal solution for rebuilding credit. A secured credit card provides consumers with the opportunity to show creditors that they are working towards a more financially sound future.

A secured credit card enables anyone of legal age to establish a credit history; therefore, they are ideal for young adults who have no credit history. Others who may find secured credit cards to be useful are those in bankruptcy or those who have had their bankruptcy recently discharged.

Establishing a credit history with a secured credit card may very well be a responsible step towards a better financial position.

Disadvantages to Secured Credit Cards

While there are few disadvantages, it is important to remember that secured credit cards typically carry a high interest rate, although for many consumers with poor or no credit, this is often an accepted trade-off.

Common Questions about your Credit Report

Credit Score

We all know that we must stay on top of our credit to maintain a strong FICO score, but how many of us actually do just that?

Your ability to obtain a mortgage, purchase a car or secure a credit card all relies on your credit rating. It is therefore of the utmost importance that you order a copy of your credit report.

Luckily, under the nationwide Fair Credit Reporting Act (FCRA), which is protected by the Federal Trade Commission (FTC), you are entitled to a free copy of your credit report from all three of the consumer reporting agencies – Equifax, TransUnion and Experian – once a year.

Now that you are armed with this information, you can begin the process of reviewing your credit report.

Q: What type of information appears on my credit report?

A: Your credit report should contain your personal information, such as your name, your address and your source of income, as well as all sources of credit. It will also report any bankruptcies, arrests or cases in which you were sued.

Q: What is a typical credit report comprised of?

A: The four sections of a standard credit report include: your personal, or identifying, information; your credit history; public records; and inquiries.

Q: What are public records?

A: Public records include such things as bankruptcies and law suits.

Q: What are inquiries?

A: Every time you apply for credit of any kind, it is typically recorded as an inquiry. Excessive inquiries do not look very good in the eyes of a creditor; therefore, too many inquiries can lower your credit score.

Q: Do I need to look at my credit report through all three credit reporting agencies, or is the information the same?

A: Each credit reporting agency has their own set of information, as well as their own credit rating for you, so it is important to review your credit report through all three credit reporting agencies.

Q: Who uses the information on my credit report?

A: The three credit reporting agencies – Equifax, TransUnion and Experian – sell this information to creditors, insurers and even your employer. They then use this information to determine your eligibility for credit cards, insurance and employment, among many other things.

Q: What if I find a mistake on my credit report?

A: If you find a mistake or an inaccuracy, you must immediately contact the credit reporting agency and file a report. It is then the credit reporting agency’s duty to research the problem and correct it, if needed.