Questions & Answers About Secured Credit Cards

This booklet gives in-depth background about secured credit cards, including how to find cards, features to avoid, costs and fees and how to successfully graduate to an unsecured credit card.

Introduction

Who is this manual for?

"Questions and Answers About Secured Credit Cards" is a training manual and group leader's guide designed to give community advocates and outreach workers a background on the topic so that they can counsel clients and/or lead workshops for other staff members. It is intended to be used with the brochure titled "Building and Repairing Your Credit with a Secured Credit Card," an easy-to-read introduction to the subject available in Chinese, English and Spanish.

How should this manual be used?

credit cards imageThis manual can help you educate co-workers and clients about how secured credit cards can help people with no credit history or damaged credit to build good credit. Many people do not realize that with a small deposit they could build a credit history that would allow them to obtain unsecured credit in the future and help them avoid higher-priced credit options such as payday loans, car title pawn shops or even loan sharks. As a community advocate and/or outreach worker, you are in a good position to spread the word about secured credit cards. Reading the brochure and this guide will give you an understanding of secured credit cards, which can guide you in counseling clients who would like to establish or rebuild credit.

Secured Credit

What is the difference between unsecured and secured credit?

Unsecured credit is a loan made on the strength of the borrower's character, past use of credit and ability to repay. Although the borrower is legally responsible for repaying the loan, to some degree the lender is making the loan on trust alone. Secured credit requires that the borrower put up collateral - assets such as a vehicle, boat, stocks or bonds, land or a home - to guarantee the loan. If the borrower defaults on a secured loan, the lender can keep the collateral.

Why do issuers prefer to offer secured credit to riskier borrowers?

Lenders usually group borrowers into categories according to risk. Lenders are not in business to lose money. The customer who has always repaid loans on time represents little risk. If a lender has no way to judge a borrower's past credit behavior or if they have had credit problems in the past, a secured loan represents much less risk because the lender can keep the designated collateral if the borrower defaults.

Credit History

What is a credit history?

A credit history is a reflection of how an individual has handled credit in the past.

What is the difference between good and bad credit?

This is a highly subjective question that can only be answered by specific lenders. But it is possible to offer some general guidelines.

People with good credit have a positive credit track record that shows they can be trusted to pay their loans and credit card bills on time and stay within their credit limits.

People with poor credit have not handled credit accounts well in the past. They have made late payments on numerous occasions, or have neglected to pay loans, property taxes or child support. Poor credit can mean having too many (more than four) credit cards with balances close to or at the credit limit, or too much of a certain type of credit, such as multiple retail or finance company accounts.

To maintain good credit, pay your bills on time, stay within your credit limits, manage your overall credit by having only the credit you need and don't max out your cards.

Will a missed payment on my credit card four years ago affect my credit?

It might, but the answer really depends on the lenders to whom you apply. Usually, just one late payment won't have much of an effect, especially if your other payments have been on time. But if you've been seriously tardy (more than 60 days late) in paying your bills several times in the past year, if your debts have been referred to a collection agency, if you failed to pay a credit card debt in the last seven years or if you've filed for bankruptcy in the past 10 years, you may have seriously damaged credit.

I've never had a credit card or loan - do I have a credit record?

Probably not. If you've never had a credit card or a loan, then it's likely that you do not have a credit report on file with any credit reporting agency (see the section on "Credit Reporting Agencies").

Credit Reporting Agencies

What do credit reporting agencies do?

Credit reporting agencies, also called credit bureaus, are companies in the business of collecting and selling information about consumers' use of credit. These companies compile payment data and other information about how individuals handle their credit accounts. This information is supplied by lenders who access it to evaluate credit applicants. The information is also sold to employers, insurance companies and landlords, to help them gauge how well applicants have handled responsibility in the past.

How many credit reporting agencies are there?

There are three major national credit bureaus - Equifax, Experian (formerl TRW) and TransUnion. (For contact information, see "For More Information" section). There are numerous smaller regional firms.

Which government agency oversees credit reporting bureaus?

The Federal Trade Commission oversees credit reporting bureaus, which operate under a 1971 federal law, the Fair Credit Reporting Act (FCRA). It gives consumers the right to access information in their credit files. The FCRA was amended in 1996 to significantly expand consumer protections. The FCRA protects consumers in many ways:

  • You have the right to know what's in your credit report, and to obtain a copy.
  • You have the right to know when your credit report has been used in a decision to deny you credit ("adverse action").
  • You have the right to ask the bureau to fix mistakes in your credit report.
  • You have the right to tell your side of the story by adding a statement of up to 100 words to your credit report.
  • You have the right to a fresh start - all negative information in your credit report must be deleted after seven years (or 10 years in the case of bankruptcy)
  • Only businesses with a permissible business purpose may access the information in your credit report.
  • You have the right to sue credit bureaus.

Credit Reports

What is a credit report?

To find out how you have handled credit in the past, lenders look at your credit report - a record of your credit accounts and loans compiled by credit reporting bureaus.

Your credit report includes current and closed credit card and loan accounts, payment history, maximum credit lines and current balance information. Negative payment information can remain on your credit report for seven years; bankruptcy, for up to 10 years. You have the right to review your credit report and correct any errors.

Credit reports may by law be provided only to those creditors, insurers, landlords and employers who have a legitimate need to see them.

Does my credit report contain any personal information, such as my race, religion or lifestyle, that could be used to discriminate against me?

Your credit report does not contain your race, religious preference, personal lifestyle, political preference, medical history, criminal record or any other information unrelated to credit.

How can I get a copy of my credit report?

If you have been turned down for credit - or insurance, employment or a rental - in the last 60 days, you can get a free copy of your credit report from the credit bureau that supplied the information used in reaching that decision. If you simply want to check your credit report, you will be asked to pay a fee of up to $8.50 per report. (Some states allow you to pay less, or even allow you to receive a free report every year.) To purchase your report, call one or all of the major credit reporting bureaus: Equifax at (800) 685-1111, Experian at (888) 397-3742 and TransUnion at (800) 888-4213. Each company offers recorded instructions for ordering your credit report.

What information do I have to give when I order my credit report?

Different bureaus have different requirements, but in most cases you will be asked for the following information:

  • Your name, including your middle initial and Jr., Sr., II, III (suffixes) if applicable.
  • Your Social Security number.
  • Your current address and all other addresses in the past five years.

How can I avoid mistakes on my credit report?

Be consistent - applying for credit without your middle initial or using your nickname can lead to mix-ups. Use the exact same name when applying for credit cards and loans. Always include your suffix (Jr., Sr., II, III) if you have one to keep your file from being mixed up with a relative's file.


Secured Credit Cards

What is a secured credit card?

A secured card is a bank credit card backed by money that you deposit and keep in a bank account. That account serves as security for the card. If you don't pay your bill, your deposit may be used to cover that debt.

Will salespeople know I am using a secured credit card?

No. A secured card looks and works exactly like any other credit card.

Unsecured Credit Cards for People with Bad Credit

I saw an ad that said people with bad credit can get an unsecured card. Isn't this a better deal than tying up my money with a secured card?

Not necessarily. Many companies now offer high-interest unsecured credit cards that target people with damaged credit. Most of these cards do not require a security deposit - but this is not always a good thing. Some cards have low lines of credit (less than $300), very high APRs, very high up-front fees ($100-$300) and no grace periods. The up-front fees usually are charged to the first bill you receive and in some cases the fees are equal to your entire line of credit. This means the card can't be used without penalty until you have paid off most of the fees.

Building and Rebuilding Credit with Secured Credit Cards

How can a secured credit card help me build credit?

Secured credit cards can be used as a stepping stone to regular, unsecured credit. Use your card to make purchases - just having the card but not using it does not help you build credit. Stay within your credit limit and make sure all your payments reach the company before the due date. If you are having money troubles, at least pay the minimum amount due on your credit card by the due date. A missed payment or a bounced payment check will set you back badly. When you can, make more than the minimum payment to avoid extra interest that will prolong your debt.

Qualifying for a Secured Card

Do secured credit card companies accept everyone who applies?

Some will, and some won't. In general, card companies are more lenient about issuing secured cards because applicants must deposit money in a savings account to guarantee the charges.

Some issuers guarantee that anyone with the money to deposit will receive a card - without checking your credit report. Other issuers require that you fill out a lengthy application, be able to meet minimum income requirements and pass a credit review.

I filed for bankruptcy two years ago, and it was discharged. Will I be able to get a secured credit card?

Maybe. Some banks will consider people with a bankruptcy on their records - they usually require that you have had no delinquent payments in the past six months and that the bankruptcy proceedings have been discharged (settled in court).

Can low income people qualify for secured credit cards?

The answer depends on which company you apply to. Some have minimum income requirements, which typically stipulate that you earn at least $10,000-$12,000 per year. However, other issuers do not have minimum income requirements. Shop around and you will probably find a secured card that fits your needs. You can compare secured card issuers on the Internet at Bankrate.com (www.bankrate.com) and Card Locator (www.cardlocator.com ).

I live with a roommate and the lease, phone and utilities are in her name, not mine. Will this affect my secured credit card application?

With some issuers it might, because some secured card companies require that you have a phone in your own name.

Finding the Right Secured Card

Where can I find companies that offer secured credit cards?

On the Internet, you can find a current list of secured credit cards online at Bankrate.com (www.bankrate.com ) and Card Locator (www.cardlocator.com).

Should I go to my own bank or credit union for a secured credit card?

Yes. Many banks and credit unions offer secured credit cards. Compare their offers to ones at other banks and on the Internet, so that you can educate yourself and get a good deal.

I've seen a lot of secured cards advertised on the Internet. How can I make sure a card is from a legitimate issuer?

Any bank doing business in the U.S. must have the proper regulatory authority. But with any financial transaction, it pays to be cautious and protect yourself against fraud. You can use the Federal Deposit Insurance Corporation's (FDIC) institutions search engines (www.fdic.gov ) to determine which government agency regulates the bank, and call the regulator to ask for more information. You can also call the FDIC at (877) 275-3342.

If you want to find out if other people have had complaints about the bank, contact your local Better Business Bureau, or surf the Internet with the help of a search engine to find out if consumers have posted complaints online.

Do all secured card companies report payment histories to credit reporting agencies?

The vast majority report payment histories to one of the three major credit reporting bureaus. However, in at least one case that made national headlines, it was discovered that a company specializing in cards for customers with less than perfect credit was not reporting. Apparently, the company wanted to keep its higher rate cardholders and not lose them to competitors when their credit improved.

Cost of Secured Credit Cards

Does every secured card issuer have the same interest rate and fees?

No - they vary widely. Of 15 secured cards listed on Bankrate.com in late 2001, interest rates ranged from 10.00% to 20.99% and annual fees from $20 to $50. It pays to shop around for the right card.

I was going to apply for a secured card until I noticed it did not have a grace period. Is this typical?

No. A few secured cards have no grace period, which means you pay interest on all purchases from the day they are made. The grace period is the time between the close of the billing cycle and the payment due date - usually at least 20 days. During the grace period, no interest accrues on your account unless you have an outstanding balance or cash advances, so if you intend to pay your bill in full every month, having no grace period will cost you money that you would not pay on a card with a grace period.

When I looked for a secured credit card, I noticed the application fees are pretty high. Do all secured cards have application fees?

No. It is not necessary to pay an application fee to obtain a secured credit card.

The late fee and over-the-limit fee on my secured card are each $35. Are there any cards with lower fees?

Yes. Check out secured cards from local banks and credit unions - they are more likely to have lower fees. In some states, fees are capped by law, which means that state-chartered banks or banks with headquarters in that state must comply.

Can I get cash with my secured credit card?

Yes. But credit card cash advances are an expensive way to borrow money, especially if you do it a lot. In most cases, cash advances are subject to transaction fees - up to 4% of the amount - and a higher interest rate.

After I had one late payment on my credit card, the issuer hit me with a late fee AND raised my interest rate. Is this legal?

Yes. When you apply for and receive a credit card, you agree to make all payments on time. If you pay late the company can charge you a late fee and raise your interest rate. This is known as a penalty rate increase and you'll be stuck with the higher rate until you've made on-time payments for several months. However, some card issuers are more lenient than others in determining how late a payment can be before late charges and penalty rates kick in. While some issuers charge a late fee if the payment is not received by the due date, others allow two or three days before penalizing you. If you think you might be late with a payment, call the company and let it know your check's in the mail - this might save you a late fee.

Your Security Deposit

How much do I have to deposit to get a secured credit card?

Many issuers require minimum deposits of $200-$300. However, most issuers let you deposit $1,000 or more if you wish.

Do all secured card issuers pay interest on deposits?

No, not all issuers pay interest on the account required for a secured credit card. But since you have to keep your money in the bank while you have the secured card, it is recommended you look for one with an interest-bearing account.

When I charge something on my secured card, does the bank take the money out of my security account?

No. The deposit is left untouched until it is obvious that you have defaulted on your credit card balance. Your money will not be used to cover the debt until you are seriously delinquent - 30 to 60 days late or more, depending on the issuer.

Can I get my security deposit back when I graduate to an unsecured card?

Yes. Most issuers will close the account for you over the phone and send you a check for your deposit plus any interest you have earned. However, some banks require you to put your request in writing.

Your Credit Limit

Is there a relationship between my deposit and the credit line on my card?

Most secured credit card issuers offer a credit line equal to 100% of the amount you have on deposit, but some will grant you credit equal to only a part of your deposit. A few issuers offer credit lines of double your deposit - a kind of hybrid account where part is secured and part unsecured.

How can I get the credit line increased on my secured card?

You may be able to add to your deposit account to increase your credit line. Some banks may increase your credit line without additional deposits after you have paid on time for several months. Other issuers charge a fee for credit line increases.

Qualifying for an Unsecured Credit Card

How long until I will be able to get a regular, unsecured credit card?

After six months to one year of on-time payments and careful use of your secured credit card, you may begin to get offers from unsecured credit card issuers. Before accepting any card, read the fine print carefully. Don't cancel your current card until you receive the new one.

Will the issuer send me an unsecured credit card automatically?

No - most issuers don't work this way. However, you may be able to apply for an unsecured card with your current lender.

Scams Targeting People with Damaged Credit

I saw an ad that said I could get a credit card, even though I have poor credit, by calling 1-900-PAY-4-THIS. Is it worth a try?

All 900 numbers cost money to call. A reputable firm would not use a 900 number to give information to potential customers. If you place such a call, it is likely that you will hear long-winded, useless - and very costly - advice.

Someone called me and said I was guaranteed to get two credit cards by paying $219 to his company - can this be for real?

This is a scam. The federal Telemarketing Sales Rule does not allow companies to charge in advance for credit. Most people who fall for such offers receive nothing and never see their money again, despite guarantees.

Consumer Rights

I found a mistake on my credit report - what should I do about it?

If you find a mistake on your credit report, such as an account that isn't yours or an incorrect balance or payment record, dispute it by filling out the form that comes with the report. The three major credit bureaus, Equifax, Experian and TransUnion, provide instructions on how to fill out the form.

Credit reporting bureaus are required to ensure that they do not allow wrong or outdated information to remain on your report. Under the Fair Credit Reporting Act, a federal law, bureaus must:

  • Correct mistakes or notify you otherwise within 30 days after your complaint.
  • Not reinsert disputed items until the company which supplied the information has certified their accuracy.
  • Notify all other national bureaus of corrections to individual credit reports.
  • Offer a toll-free number so consumers who have questions about their credit report can contact them.

I found a charge I didn't make on my credit card. What's the best way to let my card's issuer know about it?

Under the Fair Credit Billing Act (FCBA), you have the right to dispute unauthorized charges, charges for the wrong amount, charges for goods and services you didn't accept or weren't delivered as agreed, and failure to post payments and credits. Federal law limits your responsibility for unauthorized charges to $50. You must file your dispute within 60 days after the statement containing the error was led to you. You do not have to pay the amount while your dispute is being investigated. If the dispute is settled in your favor, you will receive a credit for the charge and any interest. If settled in the merchant's favor, you'll owe the disputed amount plus any accumulated finance charges.

I signed up for a credit card with an "arbitration clause" - does this keep me from bringing legal action against the card issuer?

In most cases, yes. Many businesses offer dispute resolution programs - mediation and arbitration - as alternatives to going to court. However, some businesses require consumers to arbitrate all disputes and waive their right to go to court - this is called binding arbitration, and the decision in most cases is legally binding.

In arbitration, an independent arbitrator such as an attorney, retired judge or a panel of business people considers both sides and then makes a decision. It is becoming more and more difficult to avoid binding arbitration as many credit card companies require that disputes be settled in this way. Usually the customer has little or nothing to say about an arbitration clause - "take it or leave it" - and by signing up for and using the credit card (or other service) you automatically are agreeing to settle all disputes using arbitration. However, in some disputes, an experienced attorney may find legal loopholes that allow your case to be brought to court.

How and Where to Complain about Credit Problems

I have had a secured credit card for 15 months. Recently I got an unsecured credit card. But my secured credit card issuer won't return my deposit - what can I do?

If you are carrying a balance on the secured credit card, you need to pay it off or transfer it to your new card. Once you have done this, call or write to your secured card issuer and close the account. It is important that you ask the card issuer to report to the credit bureaus that the account was closed "at the consumer's request" - as opposed to just closed, because this could be interpreted to mean that the company closed your account because you did not handle it correctly. When you close the account, ask to have your deposit returned. If the issuer does not send your deposit back within six weeks, call again and ask what happened. While it isn't typical, some banks can take months to return your deposit. If this happens, file a complaint with the bank's regulator. You can find the regulating agency's name and address by calling the FDIC at (877) ASK-FDIC (275-3342) or by visiting its web site (www.fdic.gov).

I disputed a charge on my last credit card statement, and the company is still investigating it. Do I have to pay the disputed amount right away?

No. You do not have to pay the disputed amount, or any interest on it, until the credit card issuer resolves your complaint. If you prevail, the issuer will post a credit to your account. If the dispute is settled on behalf of the merchant, the issuer will send you a letter stating that the charge is correct, along with an explanation of why it is correct. In that case, you will have to pay the disputed amount and all accrued interest.

I was on vacation and my credit card issuer put a hold on my card, even though I had plenty of credit remaining. It was embarrassing and inconvenient - how can I complain about it?

You may have been the victim of a "hidden hold". When you check into a hotel or rent a car with a credit card, the company often places a hold on the card for enough to cover the charge. Since this is a standard way of doing business, objecting to it probably won't get you far. However, you can protect yourself in the future by asking how much of a hold is being put on your card so that you won't run into trouble the next time you use it.

I disputed a charge on my credit card, but it was settled in the merchant's favor. I refused to pay the amount because I don't agree and the account ended up in collection and appears as a negative item on my credit report. Do I have any options?

You can add a statement of up to 100 words to your credit report. The credit reporting bureau must by law make sure that it is made available to any company that accesses your credit report in the future.

 

 

For more information

  • Banking regulators. Every credit card issuer is overseen by a government agency.Try to settle all complaints directly with the company. If that fails, complain to the agency that regulates the issuer.To find out which agency regulates your bank, call the Federal Deposit Insurance Corporation at (877) ASK-FDIC (275-3342), or visit its web site (www.fdic.gov).
  • Better Business Bureau (BBB). Before applying for a card, see if the BBB has any complaints about the issuer.Nationally, the BBB maintains reliability reports on about three million businesses. On the BBB Online web site (www.bbbonline.org) you can search for businesses and find out how to contact the BBB nearest you.
  • Credit reporting bureaus. To check your credit report, contact one or all of the three largest credit bureaus. Unless you have recently been denied credit, the cost is about $8.50 per report.
    Equifax Experian TransUnion
    www.equifax.com www.experian.com www.transunion.com
    (800) 685-1111 (888) 397-3742 (800) 888-4213
  • Federal Trade Commission (FTC). You can file a fraud complaint with the FTC's Consumer Response Center at (877) FTC-HELP (382-4357).The FTC does not resolve individual consumer problems, but can bring charges against a company for violations of federal consumer protection laws.
  • Consumer Action. A national non-profit education and advocacy organization providing consumer advice, referrals to appropriate complaint handling agencies and free consumer education publications. Leave a message and a counselor will call you back. Chinese, English and Spanish spoken at (415) 777-9635 and (213) 624-8327;TTY: (415) 777-9456.Web site: www.consumer-action.org.

This brochure was created by Consumer Action in partnership with Providian Financial.

Published / Reviewed Date

Published: October 12, 2002

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