Credit Myth #2; A Secured Credit Card will Improve my FICO score

Credit Myth #2

A secured credit card account will improve my credit score.

I have seen recent phenomenon where borrowers are told by loan officers to open a secured credit account to establish a positive credit history. Unfortunately, often times, they cause more harm to your credit score than they help. Here is why;

In the past, before you could open a secured credit card, you actually had to secure it 100% by depositing into an account which was then pledged, hence the term “secured”. Then your credit line was established commensurate with the amount you deposited into that  account. This is in fact a good way to establish your credit history and improve your credit score. The downside to this is there are generally high fees and rates associated with what amount to very limited risk to the lender. This is the cost one must pay when you have a poor credit history.

HOWEVER, things have changed. These issuers have discovered that they could issue more cards and charge more fees if they could remove the barrier most of their clients have; liquidity! OK, some of you are already asking yourself, how is that possible? OK, here is where it gets real cheesy. After charging the customer a processing fee that can range from $25 up to $150! The credit card issuer will issue a credit card with a $300 limit, charge the deposit to the card, yes you read this correct! They CHARGE the deposit to the card, then they also CHARGE the annual fee to the card and now the card is AT or OVER THE LIMIT which allows the lender to charge rates and fees on the entire secured balance that has never been paid therefore the card cannot be used until the balance is paid, which is accruing interest!

 The credit bureau algorithms pick up on this and read it as a new account that is already used to it’s maximum spending limit, thus actually HARMING THE PERSONS CREDIT SCORE!

To make matters worse, the borrower isn’t even aware of the harm being done because they generally are making the minimum payments, which is what the cardholder wants them to do so they can continue to charge them interest on money they NEVER LOANED THEM IN THE FIRST PLACE!

So what is the solution? If you need a secured card, GO TO YOUR BANK  or your neighborhood credit union or community bank. Open a savings account, then pledge that account for a credit card account, you won’t get the high fees or rates and you will not harm your credit score by maxing out your card before you have ever even used it! Then make sure never to carry a balance in excess of 50% or your credit limit I.e.; if you have a $300 limit, never charge more than $150. You will see a marked improvement in your credit history with your timely payments!

If you have any suggestions of good secured credit card programs, please let me know.