Should you get a secured or unsecured card?
Filed under: Borrowing, Credit
Making bad credit decisions now can cost you big-time in the long run. What do you do if you've got bad credit? Rather than paying some company to "repair" it, it's better to rebuild your credit by working with the companies you owe. One of the quickest ways to do that is to get a credit card--although obviously, that's easier said than done.
Luckily, you have options. There are two types of credit cards for bad credit: secured cards and unsecured cards. Secured cards require you to keep the equivalent of the card's limit on deposit with the card's issuer. So a secured card with a $250 limit requires you to deposit $250 with the bank that issued it; you'll get the $250 back once you close the account in good standing. The more common variety--the type issued to practically everyone with good credit--is the unsecured credit card, which doesn't have the same restriction. If you have bad credit, you can get an unsecured card, too, but there will be many strings attached.
So which type is best for you, if you're in this predicament?An unsecured credit card may seem like a quick way to access a couple hundred bucks, but ultimately, you'll likely end up with little available credit. Unsecured cards typically attach fees when you actually open and use them. Say you got approved for an unsecured card with a $250 limit. You might have to pony up a $50 setup fee, a $100 program fee, a $50 annual fee, and an $8 monthly fee--so you're already more than $200 in the hole before you've even spent a dime! And since you have poor credit, you'll also pay close to 20% interest on all these fees. You could get money faster--and on cheaper terms--at a pawn shop.
That's not to say that a secured credit card comes with an interest rate to fall in love with, or without any fees. But for someone with bad credit, it's a much better tool to rebuild. The typical secured credit card demands a deposit of at least $200 to secure the line of credit, and some charge an annual fee of up to $50. (Some cards waive the annual fee for the first year.) A healthy usage ratio and an account in good standing are the first steps towards better credit, so ultimately, a $250 secured card can give you more available credit and a better credit usage ratio than an unsecured card with a $240 balance.
Given all that, it's probably no surprise that an industry expert like Odysseas Papadimitriou, CEO of credit-card comparison website Cardhub.com, recommends secured cards for those trying to rebuild. If you have bad credit, Papadimitriou says, opening up an unsecured card amounts to tying a hand behind your back. (Papadimitriou also dispels a widespread myth: that to improve your credit score, you need to use the card, charging and paying it off every month. Wrong, he says: you could lock a secured card in a drawer, and as long as you keep up with the annual fee, your reports will reflect an account in good standing.)
Rebuilding your credit takes time. Papadimitriou suggests that, after 18 or 24 months of wise card use, you might apply for a card with better terms and see if you qualify. Doing this once a year after that won't hurt your credit score.
Reader Comments (Page 1 of 1)
3-20-2009 @ 8:18PM
j carmody said...
why do that,and put money on a credit card,and go deeper in debt? pay the minimum amount to each card you owe on. Take the credit card with the lowest balance, and double and triple up on that balance until you pay it off. Just keep paying the minimum on the cards and go to the next highest amount you owe on the next card, and double ,triple your payment until you have that card paied off. I paid $20,000,00 of credit card debt off over a three year period. and now i use just one card, and pay the balance off monthly.
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3-21-2009 @ 3:06PM
Paul said...
You are missing the point. The article is intended for people that have destroyed credit and no credit cards. Secured cards are the best way to repair your credit. Josh is right!
3-20-2009 @ 9:47PM
bill mccollam said...
The whole notion of paying $200 to get credit at a 20% rate seems wrongheaded. If it's for convenience alone - I'd always vote for a debit card. If it's to rehabilitate a bad credit rating - I'd keep looking - there has to be a better way.
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3-20-2009 @ 9:49PM
Josh Smith said...
That's why a secured card is the better choice. You basically deposit $200 that you get back and get a lower rate than an unsecured card. In some cases you can get below 10%, since the issuing bank has a security deposit.
For the average consumer, these options look pretty poor but with bad credit there aren't many other options for rebuilding your credit.
3-21-2009 @ 2:12PM
K. B. said...
I agree with you Josh. I'm in the process of re-eastablishing my credit which I can honestly say is working out very well so far. With just 1 secured loan from my credit union, I've managed to raise my lowest credit score of the 3 major credit bureaus by 70 points within the past year. My interest on that loan is 6%. Because I've made all my payments on time (1 1/2 years, I was approved for an unsecured line of credit through the same credit union. I now also have a secured credit card through my bank (my credit union don't offer secured credit cards) to assist my secured & unsecured loans in raising my score. I have 3 negatives on my credit report. Two of the negatives I'm settling with the small unsecured loan. The 3rd negative will take me the next 7 months to pay off. I can only imagine how my credit rating will look after this. I speak regularly to a loan officer at my credit union regularly (she's awesome, helpful & enlightning) and was told that just having a credit line whether secured or unsecured raises your credit score even if you use it. My score would be higher had I listened and did what she told me to do sooner.
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3-21-2009 @ 4:07PM
Heather said...
This post is SO informative! I have had bad credit for a long time and I was all confused in regards to what I should be doing. If only you had written this post a year ago...
Anyway, I followed your advice and just got a secured card. Thanks so much for all your hard work in providing us with sound advice.
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3-21-2009 @ 5:25PM
Pam said...
Thank for posting this helpful information.
My credit isn't in the best condition.. I was thinking if I should open a secured card with my bank to start improving my credit.
I had questions if it was a good idea but since reading your post.. I have decided to open a secured account and start working on improving my credit.
Again, thank you for your help.
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3-22-2009 @ 9:25PM
Paul said...
You might want to compare secured credit cards before you apply for whatever your bank offers. Remember not all secure cards are the same :)
3-22-2009 @ 9:25PM
Matt said...
I have to mention that I followed all your suggestions and I was also really impressed by the Credit Card Advisor that Card Hub has. This tool is so awesome for people like myself that do not know much about credit cards.
Thanks for your great tips.
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3-24-2009 @ 8:04AM
Betty said...
I have 5 credit cards 3 are under $1000 each and 2 are $4000 and $5000 i have never been late or missed a payment but the 2 washington mutual cards i was lied to and said i had been sent a notice of rate changes which they did not and i asked them to lower the rate and they cheated and were greedy and then i they raised my rate to 29% but not before i opted out and closed them both i can not pay minimum payments of $200 and $170 i think they are crooks and what can i do i am disabled and can't work and no health insurance and my medicines are $400 a month . What can i do?
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3-27-2009 @ 5:20PM
Kirsten said...
I am 44 w permenent disability i have 3 major credit cards and 4 men. They were out of control, after the 1% deal and went to 29% 33% ect I found a credit help program. they negotiate all the min payments and lower intrest rate you can't use them while paying off but 420 dollars is paying off each one I still kept the little ones like Fashion Bug and keep up payments but it is called revolving credit not good it you use and still pay, The Idia is good of 40% balance on credit limit but don'y ever go over w theyer "exta little "finance charge
and the 20 over the limit $49 charge and penilty my credit assistance is only $49 per month and my % are now 7% verces 29 & 33%.Member services 1-800-528-8841 they can and will help.
another card service nialed me w/ a$700 fee and never did help me or refund when tryed to cancel beware! Good luck and God Bless you kirsten D.
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