Friday, March 11, 2011

"Secured" Credit Cards - Bad Idea

Do not get a secured credit card if you can help it.

I have been a loyal depositor of the HSBC Savings Bank (Philippines) for quite some time now, having been a depositor of its previous incarnations (PCI Savings Bank and then EPCI Savings Bank). From an original minimum balance requirement of P500, it ballooned to P25,000 for a basic account. The interest rate has also plummeted to an insignificant level, certainly not enough to keep up with inflation.

I was still a medical student when the option to have a secured credit card was given to me. I was not yet earning so I was not eligible for a traditional credit card. In exchange for not touching a certain portion of my deposit, a secured credit card with a credit limit equivalent to 80% of the secured deposit was issued.

I did not use the card initially - there was no need. I'm not a particularly good spender. I used it for purchases that must be charged to a credit card. Lately I racked up a significant balance from plane ticket purchases, hotel accommodations, souvenirs, electronics, and groceries. I was not able to pay the whole balance because I was in between jobs, and it's only now that I was able to normalize my cash flow.

The current corrections in the market had me creating some projections on a spreadsheet. I came to the realization that I shouldn't be bleeding money, paying interest of 3.5% per month while my time deposit gets 0.03% interest per annum. So I made the decision to cut my losses and close my HSBC Savings Bank account.

Unfortunately this decision cannot be made unilaterally by the depositor. HSBC Savings Bank cannot close my account because my secured card still had to be canceled. Since my card was carrying a balance, I had to pay it in full before I can call in to cancel the card. The secured amount was about a third of the whole relationship balance that I had with them, but they still wouldn't allow me to pre-terminate the time deposit so that I can use part of the proceeds to pay my credit card bill.

I am basically stuck in a sinkhole, paying huge sums on interest while my idle money earns a pittance in interest. Ironic, since I thought that I would be given a chance to pay off the credit card balance in one fell swoop from my own funds.

I hope there would be at least one person who reads this and takes heed of my advice. Secured Credit Cards really are a bad idea.

4 comments:

アヤ美晴 said...

you should change the title of this blog post to

SECURED CREDIT CARDS: BAD IDEA FOR ME

overall, your post was all about how you are very bad in controlling your usage and that you did not have money to pay for it.

the title is so much misleading

shark said...

Point taken. I am very bad in controlling my usage, that's true.

I was hoping that the money I had deposited with HSBC Savings can be used to pay for the credit card balance. I had more than enough on my relationship balance to pay it off and still have enough for the secured amount to be intact.

But all that has changed. I paid off my balance already (with my salary) and am on my way to cancelling my account with HSBC Savings Bank.

I stand by my title, simply because getting a secured card ties your idle funds to a low-interest earning vehicle while you bleed money to pay the highest credit card interest rates in Asia.

Thank you for taking an interest to my blog post, and taking the time to comment on how you think the blog post title is so much misleading.

rymon said...

hsbc or any bank for that matter is right. The deposit on the secured credit card was a hold-out security in case of non-payment. You cannot cancel it unilaterally. It was required in the first place because of poor or absence of financial history. Banks protect themselves through this security because nobody can be jailed for non-payment of debt. We protect ourselves by reading the fine print. The devil is in the details.

shark said...

Thanks rymon. Indeed, a lesson learned the hard way. I'm not sore at the bank. It was just a losing proposition for me to keep the account with its very low interest.