Secured Credit Card: Secured credit cards could be a useful tool for you if you’re just getting started with credit or are working to repair your credit after a financial setback.
Secured cards give cardholders access to a credit line in exchange for a cash deposit that serves as collateral. By doing this, you give yourself the opportunity to demonstrate your creditworthiness while lowering the risk for the card issuer.
Learn more about secured credit cards, how they operate, their benefits and drawbacks, and how to evaluate if they’re the best choice for your needs.
What is Secured Credit Card?
Similar to a standard credit card, a secured credit card requires a cash deposit from the cardholder as collateral. The deposit sum frequently acts as the card’s credit limit. Secured credit cards, when used responsibly, can assist those with weak credit histories in raising their credit scores.
A protected card variant of one of their well-known cards is offered by many credit card companies. With the exception of the cash deposit, it works like a typical credit card. After a period of time, if you use the secured card responsibly and make your payments on time, you may “graduate” to the ordinary card version and receive your deposit back.
Best Features
Secured credit cards are best thought of as a transition to unsecured credit. Or, to put it another way, consider them as learning aids for credit cards. With a secured card, you’ll have the opportunity to demonstrate your capability of responsibly managing an account and steadily improve your credit score. Your deposit will be returned at that point, and you can start using unsecured credit products.
Individuals that typically investigate secured credit cards include:
- Teenagers who have never used credit.A secured credit card is an alternative to think about if you can’t get approved for a student credit card, which has less strict requirements but frequently needs enrollment at a college or university.
- People with a history of credit mistakes.It may be challenging to find a lender willing to provide you a new card if your credit has taken a hit. Secured credit cards might be the first step towards repairing your credit.
- People in adulthood without personal credit.Sometimes a person’s ex-spouse is left without access to credit when they die or get divorced. At first, a protected card might be your only choice.
Secured Credit Card Benefits
You must provide an upfront security deposit to the creditor when you open a secured credit card account. Usually, it is accomplished electronically through a bank transfer. For whatever long you keep the card open, the funds will stay in a savings account, and frequently, the sum will serve as the credit line. Your credit limit will be $300, for instance, if you deposit $300.
Credit card firms are eager to provide credit because of this collateral because they know they can keep your deposit if you stop paying your bills. Of course, as a secured cardholder, you want to make sure that you routinely make on-time payments to show that you have good credit habits. Your credit score should start to rise over time.
Some card issuers might automatically assess your account after you’ve used the card and made regular payments for a period, return your deposit, and enable you to move up to an unsecured card. In other situations, you can ask for a review of your account on your own. Give it some time, and as you go, keep an eye on your credit score’s development.
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Advantages
- You can improve your credit.To ensure that you receive “credit” for all of your good credit card behaviour, pick a secured credit card that reports to all three credit agencies.
- A modest credit limit eliminates the possibility of accruing a sizable balance.The lower limit will prevent you from getting into too much trouble if you’ve previously struggled with overspending or this is your first time using plastic.
- A few secured credit cards come with bonuses.On some secured cards, you can get cash back every time you spend money that qualifies.
Disadvantages
- Predatory products may exist. A secured credit card with exorbitant fees, an APR that is significantly higher than the industry norm, no credit agency reporting, or any other unfavourable terms should be avoided. The finest secured credit cards are typically provided by well-known banks or credit unions, but do your homework before applying.
- Making the transition to unsecured cards takes time.It takes time to rebuild credit, but the time it takes to see results can vary depending on where you start and how well you handle your secured card. Some individuals may need six months. For other people, it can take a year or longer.
- You’ll need to monitor your spending carefully.If you want to establish credit, you should work to maintain your credit utilisation (the percentage of available credit that is being used) as low as possible because it affects how your credit score is calculated. It can be difficult because secured credit cards sometimes have a low credit limit. For instance, if your credit card has a $200 limit and you spend $150, you are using 75% of your available credit. Try using the card for modest transactions or spread out your payments throughout the month to keep your utilisation as low as possible. This will prevent your balance from rising too much.
Comparing Secured and Unsecured Credit Card
A secured credit card is collateralized, meaning you put down a security deposit so the lender can take it if you don’t pay your bill in full.
With an unsecured credit card, the lender gives you a line of credit without requiring any kind of security. To make sure you have a history of making on-time payments and have the resources to cover your bills, they take extra care to check at your credit history and inquire about your income.
Comparing Prepaid debit card and Secured Credit Card
A secured credit card’s primary purpose is to get you access to a credit line and demonstrate your ability to responsibly manage it. In the end, you should switch to an unsecured credit card. On the other hand, a prepaid debit card functions as a substitute for cash. To load the card, you must pay in advance. Once loaded, you can make purchases with the card. There is absolutely no impact on your credit score and there is no credit activity recorded to the credit bureaus.
When utilised appropriately, secured credit cards can grant complete access to the world of credit. Find a secured credit card that has fair conditions, reports to all credit agencies, and offers a path to unsecured credit. Then, make modest purchases and promptly pay them off. Watch your credit score closely, and you’ll notice a gradual improvement.
FAQs: Frequently Asked Questions
Do secured credit cards help with credit-worthiness?
As long as they are used responsibly, secured credit cards are a fantastic tool for building credit. Make sure it reports to all three of the main credit agencies before making little purchases and reliably paying the balance in full each month.
Are hard pulls performed by issuers to obtain secured credit cards?
When you apply for a secured credit card, some issuers run a hard credit pull while others do not. The card application should include a note with that information.
Can a secured credit card application be rejected?
Although secured credit cards are made for people with bad credit, approval for any particular card is not guaranteed. Some issuers have more stringent requirements than others, and they reserve the right to reject some applicants for things like recently filing for bankruptcy or having insufficient income.
What is a secured credit card’s highest credit limit?
Although they can go into the thousands, many secured credit cards have a maximum limit of a few hundred dollars. Don’t forget that the security deposit serves as the cap, so you don’t want to spend too much of your available funds.
