Secured Credit Card Problems

Secured credit cards are often the last option for customers with poor credit. These cards are secured with funds in a "collateral account," or a separate bank account. A credit limit on a secured card can never exceed the balance in the corresponding collateral account. While these cards can help struggling borrowers, there are problems, too.

Credit Reports

The main advantage of a secured credit card is the credit reporting. These cards are risk-free for the lender and allow customers to make on-time payments to improve credit scores. However, not all secured credit cards report to the three main credit bureaus (Equifax, Experian and TransUnion). For borrowers, this is a lose-lose: the card will not help to rebuild credit and it will cost them interest and fees.

Fees

Almost all secured credit cards come with higher fees than traditional, unsecured credit cards. While the cards are risk-free for the lender, they can still charge extra fees. These fees are traditionally monthly processing fees and annual fees. The worst secured credit card lenders will also charge an insurance premium for the service. This can be as high as 25 percent of the total value the collateral account.

Reporting

While a secured card can improve a credit rating, it can also cause further damage. Even though the card is secured with a borrower's own money, late payments will still drag down a credit score. Borrowers are encouraged to make on-time payments--and pay off the balance whenever possible--to actually have a positive effect on their credit histories.

Scams

Some unethical companies prey on vulnerable consumers with deceptive advertising flyers and solicitations. Some prompt consumers to call their hotlines, which turn out not to be "800" numbers, but rather expensive, per-minute calls. In addition, some will finance secured credit cards, but then charge enough in fees to max out the credit card--leaving no purchasing power.

Small Limits

Credit limits on secured credit cards are determined by the balance in a collateral account. The lender controls when and how much that limit can be increased. Typical credit limits on secured accounts are between 300 and 500 dollars. This results in a small amount of purchasing power. In addition, if a secured credit card consumer borrowers over 50 percent of his available credit, his score could begin to suffer.