Smart SpendingSmart Spending

7 myths about secured credit cards

Secured credit cards aren't the same as debit cards or prepaid cards. And they're not just for people with bad credit.

By MSN Money Partner Sep 13, 2013 12:11PM

This post comes from Angela Colley at partner site Money Talks News. 


MTN logoIt's hard to function in America today without some sort of credit card. They're the safest way to shop online, and are often important -- even necessary -- to arrange for travel expenses like rental cars, hotels and plane tickets.


For many, access to credit cards is as simple as responding to a solicitation in the mail or filling out a simple online application. But for those with past problems, low income or no credit history, it's not so simple.

That's where secured credit cards come in. Put up a deposit to secure your card, and odds are good you'll be approved.


Sound simple? It is, but there are still plenty of misconceptions about secured cards.


What are secured credit cards?

When you take out a loan to buy a car, the car becomes collateral for the loan. Fail to make the payments and the car will be repossessed.


The same logic applies to a secured credit card: You're putting up collateral to secure a credit line. For example, you deposit $500 in an account and receive a credit card with a $500 credit limit. Make your monthly payments, and all's well. Fail to make them, and the bank will take your deposit.


Some cards allow you to deposit more to increase your credit limit. Others might increase your credit limit without an additional deposit after you've consistently made timely payments.


Most major banks issue secured credit cards, but you'll probably find the friendliest terms at a local credit union.


Now, let's take a closer look at secured cards and separate more fact and fiction.


1. Secured cards are for people with bad credit

Secured credit cards are only for people with low credit scores or past money management problems, right? Not always. Secured cards are also an option for students, young adults or first-time borrowers. These groups typically haven't built up a credit score and may not qualify for a traditional credit card.


And yes, secured cards are an option for people who have had trouble managing credit in the past.


2. You don't have monthly bills

Since you pay upfront, some people believe the creditor will deduct charges on the card from your deposit, and you won't get a monthly bill.


Secured cards work like traditional cards. You can spend up to your credit limit each month and you'll need to pay all of it back, plus interest if you don't pay in full each month. So you'll get a monthly statement with a total and minimum amount due.


3. Solid lenders offer only traditional cards

Another common misconception: Big lenders only offer traditional credit cards and smaller predatory lenders offer secured cards.


This isn't true. As mentioned above, many well-known banks offer secured credit cards. For example, Bank of America, Wells Fargo and Capital One all offer secured cards. There are, however, many issuers of secured cards that are fringe players and attempt to lure unsuspecting consumers into cards with high, and often unnecessary, fees. That's why you need to be careful, especially when you receive unsolicited offers in the mail or online.


4. Secured cards are the same as debit or prepaid cards

Secured, debit and prepaid cards are nothing alike.

  • Debit cards are like checks. They're linked to a checking account and when you make a purchase, the amount is automatically deducted. These cards don't offer the same consumer protections as a credit card and don't affect your credit history.
  • Prepaid cards require you to load money onto the card upfront. You make purchases until the money is gone, then reload the card. They often come with high fees and, like debit cards, they offer little in the way of consumer protections and won't affect your credit history.
  • Secured cards are credit cards. The only difference is the security deposit. You can make purchases each month up to your available credit limit, and you'll have a monthly bill. Pay on time, and you'll enhance your credit history and credit scores.

Woman swiping a credit card © Rubberball, Mike Kemp, Rubberball, Getty Images5. You won't be able to get traditional credit cards

This may be the biggest secured credit card myth floating around the Internet: If you have a secured credit card, the credit bureaus will flag your credit report and other lenders won't extend you credit because they think you're somehow unworthy.


In truth, any credit you manage responsibly helps you build a good credit history and scores. If you manage your secured credit card well, many creditors will bump you up to a traditional card after a year or so. For example, Wells Fargo periodically reviews secured accounts and "graduates" responsible consumers to traditional cards.


Important: There's no law requiring credit card issuers to report your timely payments to credit reporting agencies. So before applying for any secured card, make sure the issuer will be reporting your timely payments so you build good credit. There have been cases of secured cards that don't report payment activity, thus providing no benefit to those seeking to establish or re-establish credit.


6. You'll pay high interest

Since it isn't a traditional credit card, you'll pay crazy-high interest, some incorrectly believe.


Interest rates depend more on the lender than the type of card. There are high and low rates for both traditional and secured credit cards. Meaning, you can find a decent interest rate on a secured credit card, but you'll need to shop around. Start by visiting a local credit union, because they often offer lower rates than the big banks.


7. I won't get my deposit back

Once you pay a deposit, you won't get the money back -- or will you?


Your security deposit is completely refundable, provided you don't cancel the card with a balance due. For example, say you open a secured card and keep it for a year, then decide to cancel the card. If you've paid the statement balance, the bank will return your security deposit. You may even get it back sooner with some creditors. For example, Bank of America returns some security deposits after 12 months of timely payments.


Have you used a secured credit card, or do you know someone who has?


More on Money Talks News:

0Comments

DATA PROVIDERS

Copyright © 2014 Microsoft. All rights reserved.

Fundamental company data and historical chart data provided by Morningstar Inc. Real-time index quotes and delayed quotes supplied by Morningstar Inc. Quotes delayed by up to 15 minutes, except where indicated otherwise. Fund summary, fund performance and dividend data provided by Morningstar Inc. Analyst recommendations provided by Zacks Investment Research. StockScouter data provided by Verus Analytics. IPO data provided by Hoover's Inc. Index membership data provided by Morningstar Inc.

ABOUT SMART SPENDING

Smart Spending brings you the best money-saving tips from MSN Money and the rest of the Web. Join the conversation on Facebook and follow us on Twitter.

VIDEO ON MSN MONEY

TOOLS

More