Is a secured credit card a REAL credit card?

You’ve may have heard of secured credit cards, but you aren’t quite sure what they are. Here are some very basic things you should know before you look for secured cards. First, you can use them much like a regular credit card. You carry the secured credit card with you, and you can use it pretty much anywhere you can use a regular credit card. You (1) make a purchase, (2) pay with your secured card, and (3) owe the lender-credit card company for the amount of the purchase, plus interest and any other charges.

The big difference between a secured card and a regular, unsecured card…. You are borrowing your own money! In order to get a secured card you must first make a deposit with the lender. Most secured card lenders will put those funds in a Certificate of Deposit (“CD”). At the time you give the card issuer your deposit money, you also sign a security agreement that permits the lender to seize your deposit (CD) if you fail to pay as agreed. The lender will decide how much to lend you based on the amount you deposit. The typical arrangement: deposit $300, get $300 in credit. Most card issuers will only lend up to the amount of the deposit, while a few others will give additional credit.

The good and the bad – choose carefully.

In addition to having a credit card again, you do earn interest on your CD. That’s one good thing. Another good thing, you can rent a car. Renting one without a card is next to impossible. Finally, you are able to start building some new credit history by making small purchases and paying them off. Be aware that some of these cards will show up as secured on your credit reports, and this may reduce the positive effects of the new payment history.

In any event, don’t rush into a secured card. Look carefully at the annual/monthly fees, the interest rate, and credit limits. Even the best of secured cards has a limited utility, but the worst of them are terrible. Use with caution.