If you're shopping for a secured card, chances are you're anything but secure about your credit.
Secured cards, which hold a deposit equal to part or all of your credit limit, are designed primarily to help people with little or no credit history build a good credit history.
"They are great products if you can get a good one," says Linda Sherry, director of national priorities for Consumer Action. "That's the challenge these days. I'm disappointed to see that over the past four to five years, these secured cards have gotten to look like the so-called subprime credit cards that we see," she says.
For the most part, card issuers no longer pay interest on customers' deposits. But many are charging higher interest rates and levying more fees.
Want to be a savvy consumer and get the best deal on a card? Here are some questions for your shopping list:
1. Does the card report good behavior to the credit bureaus?
So ask which bureaus they report to and under what circumstances. If they report only late or missed payments, but don't report when you've paid on time, the card won't help you build a record of good behavior with credit. So keep shopping.
Also verify that the item truly is a secured card, not a prepaid or debit card masquerading as a secured card, says Nathalie Martin, professor of consumer law at the University of New Mexico School of Law.
The product should label itself a "secured credit card," she says. And in the description it should specify that "this product will help you build credit," Martin adds.
2. How much is the deposit and how does it relate to the credit line?
In the past, some secured cards would also allow a small credit line, sometimes as much as 150 percent of your deposit. That means if you deposit $400, your credit line on the card would be $600.
These days, 100 percent tends to be more common in the market, says Sherry.
You also want the deposit and the credit line to be fairly small: $300 to $500 is typical, she says.
3. May I see a complete fee schedule?
"You should ask for a full schedule of fees, and you should be aware of when they should be charged," says Sherry.
The Credit CARD Act of 2009 changed the rules for secured cards by prohibiting fees within the first year that exceed 25 percent of your deposit. So add up your annual fees, activation or processing fees and anything else the company charges and make sure they fall within (or better yet, well below) that 25 percent range.
You're already paying for the privilege of getting credit by putting money on ice. You don't want an issuer who's using the arrangement to drain your wallet with fees.
And think long-term when it comes to the fees, says Martin. If you plan on keeping the card for a year, "a $20 activation fee would be better than $5 a month," she says.
4. When is the bill sent, when is it due, and how long before my balance starts accruing interest?
If your credit card bill is due on the 28th of the month, but you're paid on the first, you could be setting yourself up for trouble. Ask when it is due. Under the CARD Act, card issuers can no longer change the due date at will, and cannot be due in fewer than 21 days from when the bill was sent. If the due date is uncomfortable, ask whether they'll change your bill's due date to one that fits your income stream.
Skip cards that start charging interest the minute you buy something. What you want: a card that gives you an interest free grace period if you pay your purchases off in full.
Beware of one newbie mistake: Some customers wrongly assume that the deposit will be used against their balances, says Sherry. That's not how secured cards works. Instead, your deposit is held in a separate bank account, and the issuer will only touch it if you default on your bill -- kind of like an insurance policy. When you end your relationship with the card, if you've paid your bills, you'll get that money back. So don't count on it as a cushion you can lean against if you have a bad month. They won't kindly pay your bill with it. Instead, they'll hit you with late fees of $25 to $35; if you're late enough, your interest rate may go even higher.
Consider signing up for automatic payments, "so you won't forget to pay the bill," says Gail Hillebrand, financial services campaign manager for Consumers Union. Depending on your preference, arrange so that either the full balance or the minimum will be paid automatically before the due date.
5. Where is my deposit held and how do I (eventually) get it back?
"Generally speaking, this is something that should be a short-lived relationship," says Sherry. "After a year, you can build up enough of a credit history -- if you've paid on time and handled it well -- to get an unsecured card."
At that point, you're going to want your deposit back. So before you part with that money in the first place, ask exactly what you have to do to reclaim it.
Prepare for those financial contingencies, too. Ask what happens and how you reclaim your money if the issuing institution were to go out of business.
6. Is this an institution I know and like?
Your best bet for shopping a secured card? The financial players you already know, says Hillebrand. Go with an institution that's "already doing business with you," she says. That way, "it's a relationship-generating product, not a fee-generating product."
While you might be able to get a better interest rate elsewhere, if you're truly using this card to build credit, you won't be carrying a balance. So the interest rate should be irrelevant.
7. Do I have the discipline to use the card correctly?
A secured card is a tool for people who have no credit or a "thin file" and need the card to build their history, says Sherry. Some institutions will also issue them to people who have damaged credit or who have been through a bankruptcy, she says.
Bottom line: The only good reason for a consumer to get a secured card is to establish or rebuild credit, says Sherry. That means you use it only for small purchases and pay it off immediately, she says.
"They tend to have high interest rates," says Sherry. "They are not for carrying a balance; they're to build credit. If you're using it to carry a balance, you're going to shoot yourself in the foot."
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