Secured Credit Cards–What are they? There are many want to establish your credit or rebuild your credit. Owning a secured credit card is one of the many ways to do this. There are advantages and disadvantages to owning a secured credit card.
It is very important to establish creditworthiness in today’s society. If you want to buy a home, a new car, or receive a credit card, it is necessary to establish credit for credit issuers to consider extending credit to you.
What is a secured credit card?
A secured credit card (not to be confused with unsecured credit cards) requires a cash deposit that is equal or greater that the available line of credit for your account. You are responsible for depositing 100% to 200% of your desired amount of credit. $300 to $500 is the most common deposit amount.
For example, if you deposit $500, your available credit may range from $500 – $1000. Credit card issuers may require lower deposits by offering incentives to you. In this case, the deposit can be as low as 10% of the desired credit limit.
If you are delinquent on your payment, the creditor has the right to recover the payment from your deposit. Credit unions are common places that issue secured credit cards.
Pros of a Secured Credit Card
- Your deposit can earn interest. Credit issuers may or may not place your deposit in a savings account that earns interest. The interest rates of savings accounts vary, but depending on the interest rate, you may earn a little extra cash.
- You may receive approval even if you do not qualify for a traditional credit card. Traditional credit cards depend greatly on your credit score, and because of this, you may not receive approval. A secured credit card depends on your ability to pay a security deposit so credit issuers usually accept you.
- Your security deposit covers missed payments. The credit issuer uses your deposit to cover the payments. You do not have to worry about the credit issuer reporting you to a collection agency if you miss payments.
- The credit issuer reports your information to credit agencies. Your secured credit card payment history is reported to credit agencies. As long as you make your payments on time, you receive positive reporting information to the credit agencies.
- You can establish or re-establish credit with a secured credit card. Building your credit history is very important. This credit card helps you build or re-build your credit to prove your creditworthiness to potential credit issuers.
Cons of a Secured Credit Card
- Creditors may report you to a collection agency. Even though you pay a deposit, the credit card issuer may report you to a collection agency. Spending over your deposit amount can cause a problem for you. The credit issuer cannot cover your overspending if there is no remaining deposit available.
- You must pay a security deposit. Security deposits can be as much as $500 to $1000. It may be hard to come up with this type of money to receive a secured credit card. This amount of money is enough to pay off existing debts that are currently outstanding.
- Secured credit cards have higher interest rates. Secured credit cards do not normally offer competitive interest rates because the credit issuer sees you as a high risk for defaulting on the payment arrangement. Making your payments on time each month prevents high interest charges.
- You may have additional fees to pay in addition to your deposit. Some secured credit cards expect you to pay a processing fee, application fee, and an annual fee just to receive the credit card. These fees may decrease your available amount of credit.
- You may receive a negative report on your credit. Since the credit issuer reports your payment history to the three credit agencies, it is very important that you pay on time. When you miss payments or default of your payment agreement, the creditor reports this negative information to the credit agencies. This can hurt your credit—especially if you are in the process of rebuilding or building your credit.
A secured credit card is a great way to improve your credit. This may be the only option if you do not qualify for a traditional credit card. There are good and bad aspects of owning a secured credit card that you must consider before making a decision. If you want to raise your credit score and establish creditworthiness, the secured credit card is the best way to build your financial future.