Bank Secured Credit Cards - Avoid the Pitfalls

A bank secured credit card is where you pay a deposit into the card as collateral. Normally, anyone who has bad credit or no credit history will be given this option and not a regular unsecured option. For example, if you pay $500 into the card, it means you can spend up to $500, but the deposit will not be used to pay the amount back. The banks usually need a minimum of $300 to open such a credit card.

Many people exist without having to use credit cards at all in their lives. Sometimes a person needs a one to book a hotel, or rent a car, even if you are going to pay cash. The problem comes in when you don't have a credit history, or your credit history is bad.

The benefits of this type of card will be felt for someone who thus has bad credit, or no credit history, allowing that person to improve their credit rating or to begin their credit history, for a person who has a good FICO score, this type of card should not even be an option!

If you can only be approved for this type of card, make sure it has a conversion option attached to it. This will allow you to convert to a regular unsecured card once your FICO score has improved, or has been established within a number of months or possibly up to a year. If you use your card responsibly and pay off your debt regularly and on time, your credit limit may be increased. Rather use this card to make small purchases that can be paid off either fully or quickly to improve your chances of attaining an unsecured card.

The problems with this type of card are as follows:

• There is generally an annual card fee

• Expensive application and processing fees

• The interest rate is high (roughly 22%)

• You only earn 2 to 3% on money you deposit into your account

• Interest starts from the day you use your card (no grace period)

It is always good to look at a number of different secured credit card options. You can find the best option for you in this way. Make sure to read the terms and conditions of each card you look at. Ask the card company if they report to the 3 major credit bureaus, as this will help your FICO score in the future. Often the smaller companies don't report to the 3 major bureaus, but the bigger banks definitely do, making them a better choice of company to work through.

Always do your homework on the different secured credit card options. Some of the offers can really take you for a ride. Go for a card that will have the least fees to pay, otherwise you may be paying money back without having made your first purchase. Remember to read the terms and conditions and be responsible with your money!