Should you get a secured or unsecured card?
by Mar 20th 2009 6:30PM
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.