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Secured Credit Cards
How secured cards work
To obtain a secured credit card, you deposit money in a savings account. (Minimum deposits range
from $100 to $500.) The account is frozen while you have the card. If you fail to pay your credit card debts, the funds
in the account may be used to cover your obligations.
Some issuers pay you interest - up to 4.5% - on the
account. Some don't pay interest on deposits unless they exceed a
certain amount.
Secured cards - issued with the MasterCard or Visa
logo-look and are used just like unsecured cards. To the rest of the
world, they are just credit cards.
Credit limits
Most secured credit card issuers will give you a
credit line equal to 100% of the amount you have on deposit, but some
will grant you credit equal to only a part of your deposit. A few
issuers offer credit lines of double the amount you have on deposit - a
kind of hybrid account where part is secured and part unsecured.
Some
banks may increase your credit line without additional deposits after
you have paid on time for several months. Other issuers charge a fee
for credit line increases - use caution when accepting such a deal.
Card companies have different requirements
Some cards are easy to get if you have money to
deposit, while others have strict guidelines about income and past
credit history.
Some - but not all - issuers require that you be a
U.S. citizen, while others will accept applicants with residency
status. Most companies will not consider applicants who have late
payments in the last six months on their credit report. A few issuers
will not consider applicants with a past bankruptcy.
Obtain a copy of your credit report from each of the
three major credit bureaus before applying so you can correct any
inaccuracies.
When you apply for a secured credit card, be prepared to provide:
Compare different cards
Hundreds
of financial institutions offer secured credit cards, from large and
small banks to credit unions (a financial institution owned by its
members, who share a common bond, such as the same occupation).
Many banks offer cards on the Internet as well. Bankrate.com
site allows a search of cards offered Bankrate.com site allows a search
of cards offered by national and local banks and credit unions.
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Terms to ask about
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Annual percentage rate (APR). This is the amount of interest you will pay on your balance. (If you pay your bill in full and on time every month, you can
usually avoid paying interest.) Secured credit cards usually have very high APRs of 20% - 30%.
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Annual fees.
Virtually all secured cards have annual fees - look for the lowest
annual fee and APR you can find. If the card has a monthly fee, make
sure you add up the monthly payments and compare the total to those
with annual fees.
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Application fees.
(Also called processing program, account set-up or membership fees.)
These can be as much as $250, and are charged to your first statement.
Even if you have very bad credit, it's possible to find a secured card
without these fees. Under federal law, some of these fees may be
refundable if you
cancel your account within a few days after submitting an application
or receiving a card.
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Late and over-the-limit fees.
Don't send your payment in late - not only does it hurt your credit,
but you'll be charged a late fee of up to $35. A simiilar fee is
charged when you exceed your
credit limit. Many people believe the card won't work when it's maxed
out - this isn't always true. You will continue to be charged an
over-the-limit fee every month until you bring your balance under the
limit.
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Penalty rates (default rates).
Most issuers will increase your APR - sometimes by 10 percentage points
or more - if you
make even one late payment. Don't let this happen - it will take up to
a year of on-time payments before the issuer will lower the APR.
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Grace period. The
grace period is the time between the close of the billing cycle and the
payment due date - usually at least 20 days. During the grace period,
no interest accrues on your card account unless you have an outstanding
balance or cash advances. Some secured cards have no grace period,
which means you pay interest on all purchases from the day they are
made.
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Credit reporting. Make sure that the issuer reports your payments to one or all of the major credit reporting agencies
on a regular basis. Frequent reports of on-time payments will help you build your credit a lot faster.
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