We know where to go for the best deals on secured credit cards -- and so should you.

These credit cards require you to pay first and charge later. They're designed for consumers with little or no credit history -- or a terrible credit history -- who can't qualify for a standard credit card.

But with some secured cards imposing $99.95 "processing fees" and other outrageous costs, finding the right one can literally save you hundreds of dollars a year.

Here's how a secured card works and how you should use it:

• You deposit up to $500 with the card issuer. That will be your credit limit. Most banks and credit unions pay interest on this deposit, as if it were a savings account.
• You'll get a credit card that allows you to charge between 50% and 100% of that amount. Most of them let you use all of your deposit. You can use the secured card just like a regular credit card. There's nothing that says "secured" on it.
• Just like regular credit cards, you don't have to pay the entire bill every month. You can carry a balance and pay interest on it, as long as you make a minimum monthly payment and the balance doesn't exceed your credit limit -- the amount you have on deposit with the card.

But a better idea is to charge only as much as you can afford to pay off each month. Regular, on-time payments are critical to establishing good credit. Demonstrating that you can use a card without running up any debt helps, too.

Your goal is to:

• Have the card issuer report your regular, on-time payments to the three major credit reporting companies. That will improve your credit history and the credit scores calculated from that history.
• Have the card issuer increase your credit limit without requiring a larger deposit.
• Qualify, within a year or so, for a regular credit card that isn't secured with a deposit.

Getting to that point will be much easier if you start with a secured credit card that doesn't stretch your budget with excessive fees. And remember, fees are the critical factor.

A secured credit card won't let you carry a big balance like so many regular credit card customers do.

Even if you carry a balance of $200 at a rather steep 20% annual interest rate, you'll still pay only $3.32 a month. You pay no interest if you follow our advice and pay the entire bill each month.

Watch out for secured cards that promote low interest rates but charge hundreds of dollars to open or maintain an account.

In fact, Linda Sherry, director of national priorities at Consumer Action in Washington, D.C., says, "Don't pay application fees at all."

That's why you should start your search for a secured credit card at a local credit union.

Here are a couple of examples of how good the deals can be.

Digital Federal Credit Union is the largest in New England, with members from a broad range of companies and organizations. It offers:

• No application fee.
• No annual fee.
• An interest rate as low as 8.9% on purchases.
• $30 charge for late payment or going over your credit limit.
• No ATM or cash advance transaction fees.
• Should your payment become 30 days late twice within six months, your balance will be calculated at a default rate of 17.50%.

GTE Federal Credit Union was originally created for GTE employees. It now serves workers at more than 1,300 companies in western Florida and parts of New Orleans. It offers:

• No application fee.
• No annual fee.
• 14.9% interest rate on purchases.
• Minimum $500 pledge amount.

If you don't belong to a credit union, you may be able to join one.

Find a credit union in your community here by simply entering your ZIP code. Many have liberal membership requirements, and most offer a wide range of financial services, including auto loans, savings accounts and certificates of deposit, home loans and checking, at better-than-average rates.

If you can't qualify at a credit union, our next choice would be to apply for an Orchard Bank secured credit card.

Its fees are higher, but still reasonable:

• $200 minimum deposit.
• $35 annual fee, waived the first year.
• $35 fee for late payments.
• $30 fee for going over your credit limit.
• 7.9% to 15.99% interest rate on purchases, depending on credit history.
• 5% fee on cash advances ($5 minimum).
• 29.49% default rate should you fail to make a payment or go over your limit.

The bottom line: If you pay off your balance each month and don't rack up a bunch of penalties or cash-advance fees, your annual cost to carry this card will be $35 after the first year.

Compare that with the kind of secured credit card deal we think you should avoid:

• The New Millennium Platinum card, which charges a $99.95 sign-up fee, a $59 annual fee -- and a 19.5% APR. In addition, there is no grace period, so interest is applied to your purchase amount the minute you use the card.
• First Premier Bank, which charges a 9.9% APY on purchases and cash advances, a $48 annual fee. a monthly servicing fee of $84 (assessed in monthly payments of $7) and $20 annually for an extra card. Late payment and over limit fees are a standard $29 each. And every time your account is eligible and approved for a credit limit increase, a $25 fee is imposed

Don't sign up for cards with an endless list of fees. It's money out of your pocket. You can do better.

By Carolyn Siegel

Interest.com Associate Editor

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