Home > 2012 > Credit Cards

The 411 On Secured Credit Cards

Advertiser Disclosure Comments 3 Comments

If you’re trying to establish or rebuild your credit, you’ve probably heard that a secured card is a good way to get started. With a secured card, you place a security deposit with the issuer and, in turn, get a major credit card — often quite easily.

But is your security deposit safe? A reader posted the following question on the Credit.com blog:

I have a secured credit card and have closed the account. The amount deposited for security more than covers the balance on the card, but the credit card company wants me to pay off the card (and pay interest on it until it’s paid off even though the account is closed and cannot be used) rather than using the amount already deposited with them. Is this legit? The bank (that originally issued) the card failed, and now the card is with a different bank that is almost impossible to get in touch with. I’m afraid that if I pay off the balance, I’ll never get my security deposit back. Any ideas on this? — William

William’s experience raises some important questions about how secured cards work, and is a reminder of why it’s important to choose a secured card carefully.

The security deposit you use to open a secured card is a lot like the security deposit you give to a landlord when you rent an apartment. If you pay your rent and take care of the apartment, you get your security deposit back when you move out. If you don’t, you may end up forfeiting part or all of your deposit. Similarly, with a secured card if you manage your account properly and pay all your bills, you get your deposit back after you close your account.

At least that’s the way it is supposed to work. But just like a bad landlord can hold the deposit and force you to fight to get it back, a secured card issuer that isn’t reputable can make it difficult to get your deposit back.

For safety’s sake, choose an issuer that will hold your funds in a federally-insured back account. Typically, that will be an FDIC-insured bank, though some credit unions also offer secured cards to their members and should be insured through NCUA. You can also research the safety and soundness of the bank that will hold the funds, or use it to check out a bank that currently has your deposit.

Watch out for red flags that could indicate you aren’t dealing with a reputable company. “Legitimate secured card providers will offer a variety of ways of funding the security deposit — including online transfer from a checking account or by using a debit card,” says John Yardley, spokesman for First Progress Card, a leading national provider of secured MasterCard credit cards. “They should never ask you to send cash, or to make a check out to anyone other than the financial institution.” He warns that “since the applicant is putting up a deposit, secured and prepaid card offers can sometimes be used as a scam — especially online.”

With many of these programs, your credit line will be equal to your deposit. To raise your credit limit, you’ll usually have to add funds to your deposit, though some programs will gradually increase your credit limit once you’ve established a positive payment history. And a few offer a “graduation” feature where you can get an unsecured card after a certain period of on-time payments, if you qualify. Or you may simply decide to move on to another card once your credit has improved.

When you are ready to close your account, ask the issuer for instructions if you aren’t sure how to do that. Just as some tenants don’t pay their last month’s rent because they figure their security deposit should cover it, some secured card holders may assume they can simply stop paying the bills and let their deposit cover their final bill. But that can be a costly assumption.

Many consumers choose secured cards at least in part because they are trying to establish a positive credit rating. And hopefully they’ve chosen a card that will report payments to all three credit reporting agencies each month. While that can help improve their credit scores, it can also backfire if the cardholder decides to stop paying the bills. Some issuers may report those missed payments to the credit reporting agencies, causing the cardholder’s credit scores to drop.

That’s not always the case, though. “At First Progress we report card accounts to the bureaus as ‘closed — paid in full’ so long as the security deposit covers the charges on the card account, even if the account was closed because payments were not made,” says Yardley. He adds, “It’s possible that other card programs may leave a derogatory record in the cardholder’s credit bureau file in this type of situation.”

How long does it take to get a secured card deposit back when you close the account? It shouldn’t take long if you are dealing with a reputable issuer. While there may be a short waiting period to make sure all charges have posted to the account, you shouldn’t have to wait forever to get your money back. “If the account is closed without a balance owed, the full security deposit should be provided back to the cardholder within ten days,” Yardley suggests.

Since William’s card issuer has already indicated that he needs to pay the balance before he can get his deposit back, he may be at risk of damaging his credit if he decides to stop paying. Plus the issuer may charge him interest and late fees. He may be better off paying the balance and then requesting a refund.

To be on the safe side, William can research the contact information for the banking regulator for the issuer that holds his deposit in advance. Hopefully he won’t need to contact them, but he’ll know where to turn if he does have trouble getting his money back and needs to file a complaint.

[Credit Cards: Research and compare secured credit cards at Credit.com.]

Image: natloans, via Flickr

Comments on articles and responses to those comments are not provided or commissioned by a bank advertiser. Responses have not been reviewed, approved or otherwise endorsed by a bank advertiser. It is not a bank advertiser's responsibility to ensure all posts and/or questions are answered.

Please note that our comments are moderated, so it may take a little time before you see them on the page. Thanks for your patience.

Certain credit cards and other financial products mentioned in this and other articles on Credit.com News & Advice may also be offered through Credit.com product pages, and Credit.com will be compensated if our users apply for and ultimately sign up for any of these cards or products. However, this relationship does not result in any preferential editorial treatment.

Hello, Reader!

Thanks for checking out Credit.com. We hope you find the site and the journalism we produce useful. We wanted to take some time to tell you a bit about ourselves.

Our People

The Credit.com editorial team is staffed by a team of editors and reporters, each with many years of financial reporting experience. We’ve worked for places like the New York Times, American Banker, Frontline, TheStreet.com, Business Insider, ABC News, NBC News, CNBC and many others. We also employ a few freelancers and more than 50 contributors (these are typically subject matter experts from the worlds of finance, academia, politics, business and elsewhere).

Our Reporting

We take great pains to ensure that the articles, video and graphics you see on Credit.com are thoroughly reported and fact-checked. Each story is read by two separate editors, and we adhere to the highest editorial standards. We’re not perfect, however, and if you see something that you think is wrong, please email us at editorial team [at] credit [dot] com,

The Credit.com editorial team is committed to providing our readers and viewers with sound, well-reported and understandable information designed to inform and empower. We won’t tell you what to do. We will, however, do our best to explain the consequences of various actions, thereby arming you with the information you need to make decisions that are in your best interests. We also write about things relating to money and finance we think are interesting and want to share.

In addition to appearing on Credit.com, our articles are syndicated to dozens of other news sites. We have more than 100 partners, including MSN, ABC News, CBS News, Yahoo, Marketwatch, Scripps, Money Magazine and many others. This network operates similarly to the Associated Press or Reuters, except we focus almost exclusively on issues relating to personal finance. These are not advertorial or paid placements, rather we provide these articles to our partners in most cases for free. These relationships create more awareness of Credit.com in general and they result in more traffic to us as well.

Our Business Model

Credit.com’s journalism is largely supported by an e-commerce business model. Rather than rely on revenue from display ad impressions, Credit.com maintains a financial marketplace separate from its editorial pages. When someone navigates to those pages, and applies for a credit card, for example, Credit.com will get paid what is essentially a finder’s fee if that person ends up getting the card. That doesn’t mean, however, that our editorial decisions are informed by the products available in our marketplace. The editorial team chooses what to write about and how to write about it independently of the decisions and priorities of the business side of the company. In fact, we maintain a strict and important firewall between the editorial and business departments. Our mission as journalists is to serve the reader, not the advertiser. In that sense, we are no different from any other news organization that is supported by ad revenue.

Visitors to Credit.com are also able to register for a free Credit.com account, which gives them access to a tool called The Credit Report Card. This tool provides users with two free credit scores and a breakdown of the information in their Experian credit report, updated twice monthly. Again, this tool is entirely free, and we mention that frequently in our articles, because we think that it’s a good thing for users to have access to data like this. Separate from its educational value, there is also a business angle to the Credit Report Card. Registered users can be matched with products and services for which they are most likely to qualify. In other words, if you register and you find that your credit is less than stellar, Credit.com won’t recommend a high-end platinum credit card that requires an excellent credit score You’d likely get rejected, and that’s no good for you or Credit.com. You’d be no closer to getting a product you need, there’d be a wasted inquiry on your credit report, and Credit.com wouldn’t get paid. These are essentially what are commonly referred to as "targeted ads" in the world of the Internet. Despite all of this, however, even if you never apply for any product, the Credit Report Card will remain free, and none of this will impact how the editorial team reports on credit and credit scores.

Our Owners

Credit.com is owned by Progrexion Holdings Inc. which is the owner and administrator of a number of business related to credit and credit repair, including CreditRepair.com, and eFolks. In addition, Progrexion also provides services to Lexington Law Firm as a third party provider. Despite being owned by Progrexion, it is not the role of the Credit.com editorial team to advocate the use of the company’s other services. In articles, reporters may mention credit repair as an option, for example, but we’ll also be sure to note the various alternatives to that service. Furthermore, you may see ads for credit repair services on Credit.com, but the editorial team isn’t responsible for the creation or implementation of those ads, anymore than reporters for the New York Times or Washington Post are responsible for the ads on their sites.

Your Stories

Lastly, much of what we do is informed by our own experiences as well as the experiences of our readers. We want to tell your stories if you’re interested in sharing them. Please email us at story ideas [at] credit [dot] com with ideas or visit us on Facebook or Twitter.

Thanks for stopping by.

- The Credit.com Editorial Team