The Truth About Secured Credit Cards

Secured credit cards sometimes get a bad rap. If you are in the market for one, you might hear that they charge high fees, have unethical practices like requiring cardholders to purchase insurance policies, or prey on people with bad credit simply to make money.

Are these things really true? Let’s look at some commonly heard statements about secured cards and separate the myths from the facts.

• Secured credit cards are a rip-off because they charge unnecessarily high fees.

It’s true that in the past the Federal Trade Commission has cracked down on predatory practices by telemarketers offering a credit card for a fee—but that isn’t the same thing as a secured credit card. And it was more than ten years ago. And it’s also true that secured credit cards almost always charge activation fees and annual fees. However, the biggest fee you will pay to activate your secured credit card is not really a fee at all; it’s the deposit that acts as collateral to protect the bank in case you default on your line of credit. There are secured credit cards with lower fees than others. When you are looking for a secured credit card, beware of high fees. They can usually be avoided if you shop around and compare cards.

• Secured credit card issuers require cardholders to purchase expensive insurance policies.

This one is not without precedent—it has happened—but it is easy to avoid the pitfall of the bogus insurance policy. Any reputable credit card issuer will not require applicants to purchase an insurance policy. The deposit that you put down when you open a secured credit card account is, essentially, insurance for the bank in the event that you cannot pay your credit card bill. A secured credit card that requires you to sign up for an insurance policy is a red flag that you need to look elsewhere.

• Secured cards are out to take advantage of people with bad credit and drain their bank accounts.

While secured credit cards do require applicants to pay fees that  unsecured credit cards do not, this does not mean that they are preying on people who are in a bad situation. The truth is, if you have bad credit or no credit, you may need a secured credit card. It’s hard to get by without a credit card these days—you need one to rent a car, make purchases online, or reserve a plane ticket or hotel room. When your credit is poor, sometimes a secured credit card offers you a way to have a credit card. Not only that, secured credit cards can help customers improve their credit. Any reputable secured card issuer will report to major credit card bureaus, which means that responsible borrowing behavior like staying under the credit limit and paying bills by the due date will result in positive information being passed on to the cardholder’s credit report.

Think of a secured credit card as a tool, not a long-term solution. With the right outlook and a careful evaluation of each card’s terms and conditions, it’s possible to get a secured card that helps you meet your financial goals.