The Facts on Secured Credit Cards

A secured credit card is a way for borrowers with poor or no credit to obtain a credit card without undergoing a credit check. These cards require a cash collateral deposit that becomes the credit line for that account. For example, if you put $500 in the account; you can charge up to $500. Therefore, you are using your own money, not credit, and simply running it through a bank. This allows the borrower to rebuild credit because the transactions are run through the lending bank, which is then reported to the credit reporting agencies.

Depending on the issuing bank's fees and policies, this can be a good deal for borrowers in the process of building or rebuilding their credit. However, consumers should be aware of the hidden fees and restrictions some secured credit cards impose.

CASE STUDY: NEW MILLENNIUM VERSUS AMERICAN EXPRESS BLUE SKY

The New Millennium Bank of N.J. issues the New Millennium Credit Card, a popular secured credit card.

In addition to having to secure the card with your own money, New Millennium also charges an annual fee of more than $50 and interest of 19.5% on all purchases and cash advances. Other terms include an applicant processing fee of $70 and zero grace period to repay either your purchases or your cash advances before a finance charge is imposed.

All of these fees and restrictions equal a bad deal for you the consumer. You're better off stashing your money in a plain old savings account.

The American Express Blue Sky secured card offers customers a chance to repair their credit without the burden of excessive fees. There are no annual fees, 0% APR up to 12 months on purchases, and 1 reward point earned for each dollar spent. Reward points can be used on hotels, car rentals, and airlines, among other purchases. Reward points are a big advantage for consumers, because you earn money as you spend it.

If you are thinking of applying for a secured credit card, you should read the fine print closely and also read about other customer experiences beforehand. Depending on your needs and personal situation, it could be a good deal, allowing your to get your credit back on track and conveniently make purchases that require credit cards. However, consumers should not make the assumption that secured credit functions similar to unsecured credit.

Do you have or have you had a New Millennium Card in the past? What was your experience?