Unlike applications for unsecured credit cards, applications for secured credit cards often required a one-time set-up fee or an application fee. If you are concerned that your application may be denied, ask the credit card issuer before applying if your application fee will be returned should your application be turned down. You will also want to ask if your security deposit will be returned to you should you decide to close your account in the future. Make sure you understand all the terms and conditions before you accept the card.
Along with charging an application fee, secured credit cards also usually have a much higher interest rate than unsecured credit cards. Like some unsecured credit cards, secured credit cards also have monthly or yearly fees associated with them, and you may be charged service fees for certain transactions, such as cash advances, converting foreign transactions into your national currency, wire transfers, money orders, travelers’ checks, and racetrack bets or lottery tickets.
In most cases, you will be assigned a credit limit that equals your deposit. For example, if you submit a security deposit of $1000, your secured credit card will have a credit limit of $1000. The issuer of the secured credit card does this as a protection measure. If you fail to make your payments on time or at all, they will use your security deposit to pay your debt.
Considering the drawbacks of secured credit cards over unsecured credit cards, why would you want one? What use are they? Secured credit cards are useful for three categories of people.
If you have no credit history because you have never owned a credit card or borrowed money before, you may have a hard time acquiring an unsecured credit card. In this case, you may opt for a secured credit card just long enough to build the favorable credit history that will allow you to apply for and be granted an unsecured credit card.
If you have a poor credit history or have recently filed for bankruptcy, a credit card company may not take the risk of giving you an unsecured credit card. You will need to apply for a secured credit card until you can improve your credit score.
Finally, if you have recently immigrated to a new country, you may have trouble applying for an unsecured credit card until you have a good credit history within that country.
If you end up needing a secured credit card, you are safer sticking to a card from Visa, MasterCard, or American Express. Avoid any secured credit card offers from non-brand name companies.