Understanding the Advantages and the Risks of Secured Credit Cards
In my previous article, I wrote extensively on how people with a bad credit history can have credit cards. One type of cards, discussed in that article was secured credit card.
Since I posted that article, I have been getting responses from readers. Many of them want me to discuss secured cards with more details. Well, guess what! I’ll give them more than what they want. They’ll get tips on building credit with secured credit cards from this article.
What is it?
The reason a secured card is called secured is you will always be surrounded by the safe fences aka the account limit. Unlike a standard credit card, a secured card is tied to your bank account. And unlike a debit card, the account is checking account, which means a secured credit card is a cross between a debit and a credit card. And even if you want to, you couldn’t have debt on the card.
Security deposit
The money that you have in your account is not drawn when you make a purchase using the card. The money defines your credit line, which is between 50 and 100% of the deposit you have in your account, meaning if you have $1000 in your account, the credit line is anywhere between $500 and $1000.
Secured card cost
How much does it cost? For starter, $500. You need to set up a checking account. There’s no minimum or maximum cap, but it’s recommended that you keep the minimum balance $500. There’s no extra or hidden cost other than annual and applications fees, and monthly charges. The applications fee is negotiable, and that’s a good thing.
How to get one
The easiest way to get a secured credit card is to become a member of a credit union. That’s because more than 50% of credit unions of this country offer secured cards. Tell your union that you need a card.
The benefit of getting it from your credit union is lower interest rate. In case you are not a member of a credit union, go online and do a search. You can see a slew of options, from which you can pick one.
What about banks?
Do banks offer secured credit cards? Some do, but not all. The truth is banks prefer unsecured cards over secured cards. Unsecured cards quickly generate a pile of debt. Those cards are infamous for two other reasons; cumulating fee and mounting interest rates.
Credit report leverage
Both secured credit and debit cards are safe options compared to regular credit cards. Secured credit cards, however, have an advantage, which debit cards lack. You can use the former to rebuild your damaged credit, but not the latter.
Wondering why? Because unlike a debit card, a secured credit card reports to all three credit bureaus in the United States. If you are good at saving, and if you could keep yourself within the credit limit, you’ll see your credit score increasing. At the end of the year, you’ll get a shiny credit report from the rating agencies. If you don’t know your credit score and would like to learn more about credit scores, head over to Cafe Credit to educate yourself!
Some disadvantages
Secured credit cards have some disadvantages. You’ll have to pay the interest for keeping the card. But the money that you have in your account will not generate interest. In other words, the deposit will not lay any egg.
If you are expecting the card issuer to endow you with a fabulous amount of money, which is the result of the accrual of interest on the deposit, you might be expecting too much. Not all card issuers do that. Not all of them offer rewards on spending either. What’s even more worrying is some banks don’t immediately release the money in the deposit account after you deactivate the card.
Problems you might face
If you are not careful enough, you might have to face some problems. You might fall prey to cunning schemes designed by scammers. Data thieves and online scammers know very well how desperately people long for secured credit cards. It’s easy for them to convince consumers.
You might get a call from someone, who claims himself as a lender. He tells you he’d issue you a card and offer you an unimaginably low interest rate. Don’t be a fool. This is a red flag because no issuer offers an interest rate lower than 10%.
Aside from that, not all secured credit cards are equally good. If you pick the wrong card, you may have some regrets. Besides, when issuing companies inform the credit bureaus that you are holding a secured credit card, your credit score might get lowered.
Understanding the Advantages and the Risks of Secured Credit Cards – Final Thoughts
Inquire with the provider about everything related to the card. The interest rate, the processing fee, the one-time application fee, the impact on the credit score, etc. Not all companies report to credit bureaus, so ask the provider upfront whether they report or not. Don’t believe them if they say yes. Verify it.
In short, be alert to keep all the problems at bay.
What do you think of the article? Do you want to have a secured credit card? Do you understand the risks? Let us know in the comment section.
Tina Roth is a blogger at Pro Finance Blog, a leading online resource providing high-quality “useful” content on personal finance, money management, debt solutions and many more where her aim is to help people you attain financial security through following the right advice. Apart from Pro finance blog, she also is the co-author at Finance Guest post – a community for personal finance bloggers.
