Secured Credit Cards
Secured credit cards are issued to people who either have no credit history at all or their credit history is bad and because of that they can't obtain any other type of credit. Although secured credit cards have many of the benefits of unsecured ones, like being widely accepted in shops, restaurants, hotels, etc., they have one major difference – you are actually spending your own money, not money the issuer has lent you. Secured cards are also called prepaid cards because you cover all your purchases upfront.
In that aspect secured credit cards resemble debit cards but in fact both are fundamentally different. Many merchants accept payment via credit cards only , which means that in this case you will be able to use a secured credit card but not a debit one. So, although secured credit cards are issued to you only after you deposit money in your account, they are still a credit card, not a debit one.
In some cases issuers require a co-lateral for issuing a secured credit card but generally a deposit with the issuer is also OK. It varies from one issuer to the other but generally the interest rates on secured credit cards are much higher than on unsecured and also the credit limits are lower. Most often the credit limit matches the amount of money you have deposited but it is possible to find offers that are more liberal. Sometimes one issuer has more than one type of secured credit cards and the differentiators are the credit limit and the interest rate. More favorable conditions – i.e. a lower interest rate and a higher credit limit – are offered to clients with no credit history and the really tough conditions are offered to people with bad credit history.
Besides the higher interest rate and the lower credit limits, usually there are other unfavorable conditions as well, like high fees (for approval, per transaction, late fees, etc.) and higher monthly limits. Issuers do this in order to protect their investment but sometimes the fees are so outrageously high that one starts to think if they are not taking advantage of your poor financial state.
So, with all that said, why should one get a secured credit card if it is that bad? Well, actually the people who get a secured credit cards do not have the choice, so most often they simply accept what they are offered. But even if you are not in a position to negotiate the terms, accepting the first card that you are offered is hardly a good idea. Even if you have no choice but a secured credit card, there are still plenty of offers to choose them and it will be stupid to accept the least favorable one.
Sometimes it is much better to reject an offer for a secured credit card, if its fees and charges are outrageous because chances are that such a credit card will not help you build a positive history, but on the contrary, will bury you deeper in bad credit. Also, before you apply for a secured credit card, make sure that the issuer reports it to a credit bureau because if they don't report it, all your efforts will be in vain.
Finally, when you are applying for a secured credit card, ask the issuer about the possibilities of converting it later to unsecured. Many issuers offer such options, so it is best that you know in advance if you can do it or not. Even if the issuer does not offer such options, you can always close your card when you get enough positive history and are able to obtain an unsecured one but still it is better if you can simply convert one type of credit card into another.