Secured credit cards are a popular option for individuals who are looking to build or rebuild their credit. However, there are several misconceptions surrounding secured credit cards that can often deter people from considering them as a viable option. In this article, we aim to debunk these common myths and provide you with accurate information about secured credit cards.
Myth #1: Secured Credit Cards Are the Same as Prepaid Debit Cards
One of the most common misconceptions about secured credit cards is that they are similar to prepaid debit cards. While both require an upfront deposit, they function quite differently.
A prepaid debit card allows you to spend only the amount loaded onto the card. On the other hand, a secured credit card works just like any other credit card – it enables you to make purchases up to your assigned credit limit while also building your credit history when used responsibly.
With a secured credit card, your deposit serves as collateral in case you fail to make payments on time. It acts as security for the creditor and minimizes their risk in extending you a line of credit.
Myth #2: Secured Credit Cards Have High Fees
While it’s true that some secured credit cards come with fees, not all do. Many financial institutions offer low-cost or even fee-free options for consumers looking for a secured card. As with any financial product, however, it’s crucial to carefully review and compare different offers before making a decision.
Some common fees associated with secured credit cards include annual fees, application fees, and processing fees. These costs may vary depending on the issuer but can typically be avoided by selecting a reputable lender that offers fee-free or low-fee options.
It’s important always to read the terms and conditions carefully before applying for any type of financial product so that you understand what costs may be involved.
Myth #3: Secured Credit Cards Don’t Help Build Credit
This is perhaps one of the biggest misconceptions about secured credit cards. In fact, responsible use of a secured credit card can be an effective tool for building or rebuilding your credit history.
Secured credit cards report your payment activity to the major credit bureaus just like any other traditional credit card. By making timely payments and keeping your balances low, you demonstrate responsible financial behavior that helps improve your credit score over time.
However, it’s essential to note that not all secured card issuers report to the major credit bureaus. Before applying for a specific secured card, verify with the issuer whether they report payment activity to help build your credit history.
Myth #4: You Can’t Upgrade From a Secured Card to an Unsecured Card
Another common misconception is that once you have a secured credit card, you’re stuck with it forever. However, this is far from accurate. Many reputable lenders offer options for upgrading from a secured card to an unsecured one as you demonstrate good financial habits and build a positive credit history.
Typically, after several months of responsible use and on-time payments, some lenders may review your account and offer you an opportunity to transition into an unsecured line of credit while refunding your initial deposit. This allows you to continue building your credit without having to maintain a collateral-backed account.
It’s important to note that each lender has its own policies regarding upgrades from secured cards. Be sure to inquire about these options when choosing which card best suits your needs.
Myth #5: Secured Credit Cards Are Only for People With Bad Credit
While secured cards are indeed helpful for individuals looking to rebuild their damaged or limited credit histories, they are not exclusively designed for people with bad or no previous credits scores.
In fact, many individuals who are new to the world of borrowing may find it challenging initially due to lack of established financial history. A secured card can provide them with an opportunity to start building their score by demonstrating responsible financial behavior.
Secured credit cards can also be beneficial for people who have experienced a recent bankruptcy or other financial difficulties and need to rebuild their credit from scratch. By using a secured card responsibly, they can gradually improve their creditworthiness.
Myth #6: Secured Credit Cards Are Not Accepted Everywhere
Some individuals worry that secured credit cards are not as widely accepted as traditional unsecured cards. However, this is generally not the case. Most secured cards are issued by major financial institutions and come with the Visa, Mastercard, or American Express logo – making them widely accepted both online and in physical stores.
However, it’s always prudent to check with the issuer about any potential limitations regarding acceptance before applying for a specific secured card.
In conclusion, securing a credit card is an effective tool for building or rebuilding your credit history when used responsibly. By understanding these common misconceptions and debunking them, you can make informed decisions about whether a secured credit card is right for you. Remember to compare different offers from reputable lenders to find the best option that suits your needs and helps you achieve your financial goals.