Secured credit card fees
One place to look out when using secured credit cards is the fees. Card issuers know applicants for secured cards have few other options and are at a high risk of not paying, so they make up for that risk with high fees and high-interest rates.
Most secured credit cards charge an annual fee. Annual fees are sometimes worth it, but if you can find a secured card with no annual fee, that is a better option. The Capital One Secured Mastercard and Discover it Secured Card are both good options with no annual fee.
Also look out for other usage fees. Late payments, cash advances, and foreign transactions are all common places to get swept up paying more and more. Avoid fees wherever you can. It’s better to keep that money in your pocket.
By paying off your card in full every month, you’ll avoid interest charges, which can be quite high on secured credit cards. In some cases, issuers charge nearly 30% APR. Pay your card off in full every month and you won’t have any interest to worry about. Even better, put the card at the back of the drawer and only use it and pay it off every few months. That way you have little risk of making mistakes.
The sweet spot: build credit and avoid costs
For secured credit cards to make sense for you, you’ll want to avoid high costs and work toward a goal of building credit. Unless you have a secured credit card with no annual fee, you may want to just keep it for a few years while building credit before upgrading to a new card with no fees and closing the old secured card.
But during the time you have the card open, you should use it responsibly to reach into the higher tiers of credit scores. The best credit cards, loans, and interest rates are for borrowers with “excellent” credit, which starts around 720-740 up to a perfect 850 credit score.
While some card issuers are upstanding companies, read all of the fine print and look out for anything suspicious. You don’t want to open up a new secured credit card just to find out it costs more than you expected and won’t help you realistically reach your credit goals. Spend time researching every card, limit it down to your top options, and you should be in good shape moving forward.
Should you get a secured credit card?
Secured credit cards do not make sense for anyone with good or better credit. Those brand new with credit, usually young people and new immigrants, may be able to avoid a secured card by looking for student credit cards or cards with lenient credit approval requirements.
But if you have bad credit and want to turn it around, a secured credit card can help. As long as you pick the right card, use it responsibly, pay it off in full each month, and avoid fees, your card should treat you well. That’s what building a great credit score is all about.