With a credit score of 789, Lisa Dalton gets offers for platinum cards these days. But in the mid-1990s, her credit was devastated by bankruptcy and divorce. However, she was able to turn things around with the help of a secured credit card.
Secured credit cards require an upfront deposit and offer a very low spending limit — typically $500 or less to start.
Such cards lost favor in the free-credit frenzy prior to the recession, as many banks lowered their credit standards and issued regular credit cards to risky consumers. But with the epidemic of mortgage foreclosures and credit card defaults, and a 31 percent jump in personal bankruptcy filings last year, industry watchers expect the popularity of secured cards to grow.
Dalton had to deposit $200 to get a $250 credit limit. As she established a record as a responsible customer, the bank raised the limit on the card, and after a few years, switched her to a traditional, unsecured card.
The card also helped her establish enough of a positive credit history to get a mortgage. She has since opened other credit cards with better terms, and even financed part of her education.
Secured cards represent just a small slice of the nearly $1 trillion U.S. credit card market, and they are not without their pitfalls.
Besides the deposit, for instance, some cards charge very high fees. In fact, the first bill with some cards could include fees that eat up most of the credit limit. This could hurt your credit score instead of helping it.
Secured credit cards also often charge high interest rates — 19.9 percent is common — and the low credit limits make it easier to end up getting socked with over-limit charges. What’s more, some secured cards begin charging interest right after a purchase, offering no grace period for customers to pay their balance off first.
If your thinking about applying for a secured credit card, make sure that the credit card you’re considering reports to the three consumer credit bureaus.
The moral of this story is that secured credit cards can help you re-establish and rebuild your credit, but you don’t want to use them for the long-term.
Source: Tulsa World
