Using a credit card is the fastest and the best way to build good credit, but the problem is you do not get a Secured credit card if you do not have a good credit history. Secured credit cards help people who have bad or not that great credit history to obtain a credit card in the first place.
The use of modern technology in the financial space has revolutionized the very idea of lending. Thanks to Credit Cards you can now use a huge line of credit, from anywhere you need, wherever you need.
What is a Secured Credit Card?
A secured credit card derives its meaning from the fact that the line of credit that you get with it is secured and is backed by a cash deposit that you make to obtain the credit card. This deposit that you make serves as collateral on the account providing the card issuer with some security just in case the cardholder is unable to make the payments. Thus the deposit reduces the risk to the issuer.
So what happens to the deposit that you have made for the card? The best part is you will eventually get it back if all goes well and if all your payments are made in time. What’s more, if you have used your card responsibly with proper payments you can finally qualify for an unsecured card and you get the deposit refund.
Secured v/s Unsecured Credit Cards
Unsecured cards provide a fixed credit to the cardholders that the card issuer decides upon thorough credit checks of the applicant. If the applicant is someone with a very good and vast credit history over the years, the card issuers can provide bigger and better credit limits to the applicants. The card issuer determines the credibility of the applicant based on his past credit and payment histories with all other billers and financial services and decides a credit limit that is then given to the card. The cardholder can use the card for transactions up to the provided limit. The usage on the card is then billed and sent to the credit card holder in the form of credit card bills which the card user can opt to pay via methods of his/her convenience. With unsecured financial products like a credit card, the risk on the card issuer is too high.
Secured cards, on the other hand, need the applicants to deposit to obtain a credit card. This is primarily for applicants with a bad credit history or a credit history available for less time (thin credit). The credit limit on the card is up to the deposit you have made. That means if you have made a $200 deposit (that is usually the deposit for most of the secured credit cards) you get to use $200 for credit card transactions. This usage, however, is billed and sent to the cardholder on a monthly or a quarterly basis; which the users can pay through convenient means and the deposit stays safe with the issuer which is refundable eventually or when the cardholder is finally eligible for a regular card. Secured Cards pose minimum risk to the card issuer and hence get readily approved.
How do secured credit cards work?
Secured credit cards work more or less the same way as an unsecured credit card provided the deposit is made and the payments are made on time. You can use them at all merchant outlines and online platforms wherever the credit cards are accepted. Since credit cards are the best ways of building credit, once you obtain a secured credit card you can build your credit or improve your credit scores if you have been a defaulter in the past by responsibly using the card. If you have a balance that remains unpaid for time, you might accrue an interest.
Most card issuers issue both secured and unsecured cards. There might be an annual fee for these cards that is applicable which can be up to $50. Getting a secured card if you don’t get approved for an unsecured one is the best way to rebuild or improve your credit. But you must ensure you use these cards responsibly and repay on time like in all other loans or other financial products that show up a bill on the credit report.
Some would think a secured credit card is as good as a debit card that is linked to the bank account. There are however some subtle differences. Let’s look at these differences.
Secured Credit Cards v/s Prepaid Debit Card
While a prepaid debit card might look similar to a secured credit card, but there is a difference. With a prepaid debit card, you use your own money for making the purchases and other transactions. With a prepaid debit card, you have to keep on loading money in the debit card for use. With these prepaid debit cards account activities are not reported to the credit bureaus. You are not building any credit history while using these prepaid cards. Plus they also have an annual fee associated with them.
Secured Credit Cards on the other hand just have the deposit that needs to be paid to get you the deposited amount as the credit limit. You just need to clear your bills on time and no need to load balances. And the best part is every activity and every payment made is reported to the credit bureaus thereby helping you to build an impeccable credit history.
So undoubtedly, a secured credit card is the best if you are looking forward to building your credit to have better chances in the future if you need to own a house or any other assets where credit rating is thoroughly checked to approve you for mortgages and loans or any other line of credit for that matter.
Secured Credit Card Structure, Terms and Conditions
Secured credit cards are generally issued by almost all the major card issuing companies and lenders such as MasterCard, Visa, Discover, American Express, etc. Cardholders can use their credit cards wherever their card brand is accepted as a mode of payment. Once they receive the statements which are generally monthly, they are supposed to pay the minimum due along with the interest accrued on the outstanding balances. All these terms are outlined in the agreement that you sign while applying for the card.
There may be some fees apart from the annual fees we discussed earlier which include the activation fees, setup fees, maintenance fees, balance inquiry fees, etc. Now all of these fees can cut into your deposits that you have paid, so examine the terms and conditions carefully before signing up. You might also have to pay an APR, which is the Annual Percentage Rate. Usually, the APRs of the secured cards are on a higher side with going a little over 20%. But you will have to live with it since being someone with a not that great credit history, getting a secured credit card in the first place makes up for the high APR.
As far as the deposit is concerned, the deposit is kept on reserve by the card issuer and is kept as collateral. This reserve may be used in the event of a default or non-payment by the cardholder. Upon cancellation or forfeiting the card, the cardholders get the deposit back assuming that all outstanding balances are paid in full.
Who uses a secured credit card?
Like we discussed earlier secured credit cards are especially aimed at people with a poor or thin credit history. This is the best for people who find it difficult to qualify for a normal credit card. However, that does not restrict anybody else with good credit for getting this credit card. This card is a way to improve the credit ratings and building or improving the credit if all payments are made on time.
So this card is generally used by people with bad credit history and who would like to improve their credit history or anybody else who would like to have this type of credit card for whatever reasons they have.
Using a secured credit card effectively
A secured credit card since it requires a deposit, you must ensure that the card is used very judiciously and responsibly. Follow these tips to make sure your card is used effectively:
- Use the card only when it is absolutely required, to make only small or purchases that are absolutely required.
- Try paying your balances in full by the due date. If you make payments in full, you won’t accrue the higher than usual interests for secured cards.
- Keep a close eye on your credit scores and when you see your scores considerably improved you may ask your card issuer to upgrade to a normal unsecured card.
Generally, it takes about a year to improve your credit ratings with a secured credit card that will enable you to qualify for an unsecured card. Some of them even allow you to transfer your secured credit line to your unsecured card which is even better, that’s because you get an unsecured card without the need of opening an account. And even if you have to apply for a new unsecured card, you will get all the benefits of the good credit you have built with your secured one, low-interest rates, competitive fees, and many joining rewards.
Up until now, we have been able to bring out the differences in the secured and unsecured cards and have talked of quite a few aspects. By now you know for sure that obtaining a secured credit card has many benefits. Let’s look at the good things about these cards in detail.
Pros – The Good Things
Secured credit cards are certainly the best option to opt for in trying to build or rebuild credit. Let’s state some of the good aspects of these cards explicitly:
- You may get approved for an unsecured credit card when no other credit card approval comes through. That way you have at least some kind of a financial instrument in your hand to help build and improve your credit.
- Regular reporting to credit bureaus ensures the transactions that you make do not go in vain and is at least getting utilized in building up your credit history.
- A secured credit card can help you get a normal credit card provided a good payment history is maintained.
- You do not lose your deposit. The deposit is completely refundable and you can get it back once you close the card or upgrade your services.
- The best part is you can earn interest on your deposit. Some of the issuers place your deposit in a savings account allowing you to earn some interest.
Cons – The not so good things.
There are two sides of a coin and where there are some pros, there are some demerits of a secured credit card too. Let’s find out how:
- The security deposit is a hefty $200 or more. And if you are a candidate with bad credit, arranging that much may also get difficult if you are already paying off debts.
- There are a hell lot of fees associated with a secured credit card. These may include, application fees, joining fees, processing fees, maintenance fees, annual fees and what not. So make sure you are read the minute terms and conditions before signing up.
- The interest rates with a Secured Card are usually very high and if you don’t pay up on time you may have to pay hefty interest charges.
Now, that we have seen all aspects of the secured credit cards, it is the best tool to build and improve your credits. When getting a traditional or a usual credit card looks difficult, secured credit cards are the perfect rescue plan for all your low, bad or damaged credit rating woes. Contact your banker or a card issuer today to know your options.