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Secured credit cards are an option for people who have little to no credit history, or who have faced some financial challenges. The process for applying and using a secured credit card is different than for other forms of credit. However, it can be an effective tool to help build or repair a credit rating. With the advantages come some drawbacks, though. Therefore it is useful to think through all of your options before filling out that application.
Secured credit cards are different from unsecured credit cards. A secured credit card typically requires the applicant to pay a certain amount of money in security that’s held against the credit available on the card. This deposit shifts the risk away from the credit card company, as they can keep this money in case the card is in default. For the cardholder, there’s the opportunity to earn interest on the deposit for as long as it is held. Credit card companies hold deposits in a FDIC-secured account for as long as the card is active.
One of the issues with poor credit is high annual fees on unsecured cards. By opting for a secured card, the cardholder may have to pay less for the privilege of getting the credit. This may help the cardholder to have cheaper access to credit while they are still building up their credit score. The secured credit card helps them work toward qualification for more affordable kinds of credit with better interest rates and lower fees. Most secured card companies will offer their own path to an unsecured card.
Perhaps one of the best things about a secured credit card is that it doesn’t look any different on a credit report than an unsecured card. There may be some exceptions to this, so it is a good idea to ask the credit company if they do reveal the kind of card in reporting — and also to ensure that they report payment history to credit bureaus. For the most part, however, it gives a cardholder the chance to build up a history of on-time payments.
Since a secured credit card requires a deposit, it is usually easier to get approved than with a traditional credit card. Many cards will still search credit history, but some will not, choosing to approve credit on the basis of the security alone. But for people who want entry or re-entry into the credit market without having to use traditional cards with unfavorable terms, this is a good option.
Of course, there are some drawbacks to a secured card. You have to come up with the money for the deposit, and you don’t get that money back until you close the account. The credit ceiling on a secured card is usually quite low, about a few hundred dollars, and credit experts recommend not using any more than 30 percent of your credit at any given time. For a card with a $500 limit, that’s about $150. Also, secured cards usually have to be paid off every month.
When you’re reviewing your credit choices, think carefully about what you will get — and what you won’t get — with a secured card. For many, it can be a sound way to develop a strong credit history.
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