Secured Credit Cards: An Overview
Credit cards can be a useful tool for building credit, making purchases, and managing your finances. However, if you have little or no credit history or damaged credit, it can be challenging to qualify for a traditional unsecured credit card. This is where secured credit cards come in.
What are secured credit cards?
Secured credit cards are a type of credit card that requires a security deposit as collateral to open the account. The security deposit acts as insurance for the issuer in case the cardholder is unable to pay their balance. The amount of the security deposit typically ranges from $200 to $2,000 and determines the initial available credit limit on the card.
Unlike prepaid debit cards that require users to load money onto them before using them, secured credit cards function like regular unsecured ones and allow cardholders to make purchases up to their available limit. Cardholders must make monthly payments on time and pay interest charges on any unpaid balances.
Why get a secured credit card?
Getting approved for an unsecured credit card when you have limited or negative history can be difficult due to lenders’ high risk of default. Secured cards offer an opportunity to build or rebuild your score by making timely payments each month while also enjoying some perks like rewards points or cashback programs offered by some issuers.
Once you’ve established good payment behavior over several months with your secured card, you may become eligible for an upgrade with better terms such as higher limits and lower fees. Additionally, having a positive payment history with one lender may increase your chances of getting approved by others down the road.
How do I choose a secured credit card?
When selecting which secured card is right for you, there are several factors worth considering:
– Security Deposit Amount – Look at what kind of deposit is required; this could impact whether it’s affordable enough.
– Annual Fee – Some issuers charge annual fees ranging from $25 to $49, which can be costly and eat into your credit limit.
– Interest Rates – This is the amount you’ll pay for carrying a balance on your card; rates can range from 15% to 25% or more.
– Rewards Programs – Some secured cards offer rewards points or cashback programs that can help offset costs.
It’s essential to research each option thoroughly and compare fees, interest rates, and any other features before deciding on a particular product. You should also ensure that the issuer reports to one of the three major credit bureaus (TransUnion, Equifax, or Experian), as this will allow you to build your credit history responsibly.
Are there any downsides?
While secured cards can be an excellent way to establish creditworthiness, they do come with some potential drawbacks:
– High Fees – Annual fees and interest rates are often higher than those found with unsecured cards due to lenders’ perceived risk.
– Security Deposit Requirements – Cardholders must have enough money upfront for the security deposit required by their chosen issuer.
– Limited Credit Lines – The initial available limit may be low depending on how much is deposited initially.
If you’re unable to make timely payments each month, defaulting could result in losing your security deposit. Late payments also negatively impact your credit score and undo all of the work done building it up in the first place.
Final Thoughts
Secured credit cards provide a useful path towards building or rebuilding a positive payment history when traditional unsecured options aren’t viable. However, choosing an appropriate card requires careful consideration of factors such as annual fees and interest charges while ensuring responsible usage practices like making timely payments. By doing so consistently over time, you’ll increase your chances of upgrading to better terms in addition to developing good financial habits that will benefit you throughout life.