Applying for A Secured Credit Card

Consider applying for a secured credit card, if you have a bad credit history or no credit history and want to establish your credit.

Unsecured credit cards are not easily obtained for those with a blot on their credit rating or someone who hasn't established a credit history. Lenders are hesitant to take the chance on any person who doesn't have a flawless credit history.

This kind of credit card looks identical to an unsecured credit card and usually offers the same security and charging privileges.

The difference is that you'll have to pay the credit card company a deposit of security that amounts to the same amount as your credit line. This assures the company that they will get their money back if you turn out to be a bad credit risk.

Secured credit cards work more or less like bank debit cards, except the money spent is not withdrawn immediately and the user makes payments monthly.

They're also similar to 'prepaid' credit cards, in that money must be outlaid first. With prepaid cards, however, the cards are 'loaded' with any amount desired. Besides, there are fees extracted every time the funds are input.

Some credit card companies may be willing to give you a limit that is a little above your security deposit while others will only offer a limit that is lower than your security deposit.

If you are considering this, do shop around to find out what your options are.

It may be the right card for you:

• if you've had a disruption in your employment or have recently started a new job
• if your credit history is poor
• if you have delinquent student loans
• if you are separated from your spouse who has a high debt ratio
• if you have declared bankruptcy

A secured credit card does the following:

• Offers security in times of emergency
• Helps you to establish credit if you do not have a credit history
• Gives you many of the same benefits as an unsecured credit card
• Helps you re-establish your credit if you have bad credit or have had to declare bankruptcy

Disadvantages:

• The funds you deposit are frozen until such time as your credit history is re-established security deposit, usually equal or more than your credit limit
• You may not be reimbursed for the interest on your security deposit

Of course, there's no free lunch associated with obtaining and using a secured card.

Since the applicant is considered high risk, a higher APR is charged. That makes making monthly payments harder, which is usually what generated bad credit history originally.

To work around the dilemma, users should be sure, (for the first year, at least), to keep charged amounts low and make efforts to pay off almost all the amount due when the bill arrives.

Notice 'almost all' because one of the most effective ways to build good credit history is to make payments on time and pay some interest.

That raises your credit score quickly. If you use your "secured" card wisely, soon you'll be on the path to a good credit history.