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Secured Credit Cards: The Good and The Bad

Do you have a bad credit rating? Worse, do you have any credit at all? You can say that these are the toughest times to get a credit card. To get one you will need to start rebuilding your credit.

Now, that can be a catch 22 since a lot of banks won’t even give you a chance to prove that you can pay on time. So, how can you make good credit history if you normally don’t get approved when you apply for a credit card?

Top 4 Secured Credit Cards

Visa Credit Card

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Visa Credit Card

Cum sociis natoque penatibus et magnis parturient. Pro vel nibh et elit mollis commodo et nec augue

Visa Credit Card

Cum sociis natoque penatibus et magnis parturient. Pro vel nibh et elit mollis commodo et nec augue

Visa Credit Card

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What are Secured Credit Cards?

This is where secured credit cards come into play. It’s not a traditional credit card – well, not like the ones you will normally get from any bank. The big difference between a regular credit card and a secured credit card is the fact that a bank will require you to make a deposit when you get secured credit.

That is why they call it “secured.” You leave something behind as a form of collateral. You deposit some cash and they will give you a credit line – it will be pretty much the same amount (or less) as the deposit you made.

Any purchases you make through this kind of credit card will be insured via the deposit you made. In case you default in your payments – you have late payments and the interest in your purchases have piled up then the bank simply keeps the money you deposited. It is they’re insurance anyway – that way they are sure to get money whether you pay your credit card bills on time or not.

If you are able to keep a good standing with this secured account then after a few months (usually it takes a year, but sometimes longer) then you can withdraw your deposit. Another way you can get your deposit back is by closing your account. The card issuer will facilitate that for you.

When that happens, you will now have a good credit history. This will improve your chances next time you apply for a regular credit card. You can say that it’s a way to fix your credit rating.

As stated earlier, your credit limit will usually be equal to the deposit you made earlier. Some banks also issue a bigger credit limit than the amount of money that you deposited. Note that before that happens, your credit rating should be better.

Only account holders that have a good standing when it comes to their credit will usually be afforded a chance to get a higher credit limit. Don’t expect to get that if you are applying for a secured credit card for the first time. Nevertheless, it’s something to look forward to as you build a good credit history.

A secured credit card works very much like a regular credit card that requires no deposits. You can go shopping with one. You can go ahead and swipe away to your heart’s content.

And just like a regular credit card you also get a bill at the end of the month. You also can’t go over your credit limit. You can’t say that since you already have some sort of collateral that you can go overboard. It just doesn’t work that way whether you use secured credit or not.

Benefits of Secured Credit Cards

 

To some people getting secured credit may not sound like a practical choice. In fact, some people may think that it doesn’t make sense. The general idea of putting money in so you can borrow the same amount of money doesn’t sound like a win/win deal.

However, you have to look beyond the amount of money you can borrow. Focus on the goal. Remember that the goal is not to get a credit card. The goal is not to obtain a line of credit. The goal is to create good credit history and repair or rebuild your credit.

Stick to that goal and you will reap the benefits of getting a secured line of credit. Here are some of the benefits of this unconventional kind of credit card:

 

Easier to get approved

It is easier to get approved if you have a security deposited: If you compare the approval rates for a secured card versus that of a regular credit card, you will notice that it is easier to get approved if you go for secured credit.

 The bank or any card issuer will usually check your credit history. More often than not, they will automatically disqualify you due to any bad records you may have had. The bad record doesn’t go away that easily.

The way regular credit cards are setup, it is the bank or some other financial institution that assumes the risk when you make purchases out of credit. That isn’t the way things are when you opt for a secured credit line.

The tables are turned in that sort of arrangement – instead of the bank it is you (i.e. the card owner) who will assume the risk. By virtue of the security deposit the risk of the credit purchase transfers from the card issuer to the card owner.

Your secured credit card record′s get reported to credit bureaus

The record of your secured card activity gets reported to credit bureaus: Your credit activity gets reported to bureaus just like a regular credit card.

Every purchase you make is recorded and reported. The same thing happens when you make payments. Whether you pay late or on time, it gets reported to the authorities. If you make earnest efforts on your payments and do not default, then your credit scores improve.

Secured credit cards help you re-establish your credit

Secured credit cards help you re-establish your credit: There are two things that you can do to make sure that your credit scores eventually improve. The first thing you can do of course is to pay on time.

Timely payments are included in your credit report, which is a good thing if you have poor or bad credit. Another thing you can do is to manage the balance you have on your card. If you don’t max out your secured credit, then you also get the benefit of a positive credit report, which also improves your credit score.

It may take a while before your credit score becomes favorable. Work on it and keep paying on time. Your credit score will slowly move up and improve. Once your scores have improved to a certain degree, you may become qualified for a regular credit card eventually.

No credit checks:

No credit checks: Unlike regular credit cards, no one will snoop around and check your credit history. This may be the biggest benefit you can get compared other types of credit cards. Note that the amount of money you deposited as a security is insured by the FDIC. The said amount is refundable.

Don′t lose money

You do not lose any money except for the security you deposited: If you are late in your payments you will also get charged for late payment. That is computed against the total deposit that you made when applying for secured credit cards.

However, if you default in your payments, you will get billed, the amount you have to pay may increase due to interest. You don’t get charge any amount on interest in case you default in your payments. They won’t collect on your defaults – unless of course the amount on your defaulted balance is higher than the amount of your security deposit.

Sure the company that issued your credit card will take the money you deposited. However, that’s the end of the deal. You won’t hear from credit collectors reminding you of your obligations. In the eyes of the bank, you have already paid your obligation when they kept the money that you deposited.

You don’t get any collectors hounding you each month for the amount you owe or missed payments on the credit card. The only downside to all of that is your credit score gets bad marks if you have late payments.

 

Higher credit limit eligibility

Higher credit limit eligibility: You can get a higher credit limit for a secured credit line. The usual credit limit will be equal to the security deposit that you paid. However, you can increase this amount if you pay your dues on time. Another way to get a higher credit limit is to increase the deposit. You may have to arrange that with the bank.

Earn interest on the amount you deposited

You can earn interest on the amount you deposited: The interest may not be that big however, any dollar you earn out of any financial instrument you take advantage of is an added plus to you. Note that not all credit card issuers will place your deposit in a savings account that will bear interest. 

However, if it does then that is an added benefit for you. Some savings accounts that is associated in conjunction with secured credit cards may be in the form of a time deposit. Time deposit accounts usually earn higher interest but you won’t be able to withdraw your money until a given amount of time.

Grace Period

Grace period: Some secured credit cards offer a grace period in between payments. The grace period can be as long as a few days in between the last day of your billing cycle and the due date for the bill you have to pay. 

Not all secured credit lines will offer this feature. It is important that you get one of these cards that offer grace periods. This will actually give you more time to come up with the needed cash.

Downsides of Secured Credit Cards

Now that you have seen the benefits of getting this kind of credit card, it will only be fair and honest to let you know of its downsides. Nevertheless, the downsides of these credit cards aren’t that bad compared to its intended benefits.

Here are its drawbacks:

Paying the initial deposit

Applying for a secured credit line means that you will have to pay for the indicated security deposit. The amount for the security deposit can be a bit pricey.

On top of that, you are already facing a financial crunch, which is why you defaulted on your credit in the first place. Asking for two hundred dollars up to five hundred dollars for a security deposit can sound a bit too much during such times.

TIP: set aside small amounts of money each payday until you are able to save for the smallest amount of security deposit you can find. Search for different banks that offer secured credit lines. Pick the cheapest ones.

Once you have saved enough money apply for one. However, don’t spend your credit on things you don’t need. Use the credit to pay for bills and other debts. That way you get to use the credit line to help you improve your credit scores.

Higher interest rate

Another downside of this type of credit card is the fact that these cards usually have a higher interest rate. Let’s face it; shops, stores, and other businesses know that a lot of the people who use these cards have bad credit, which is why they don’t usually offer good interest rates.

Everyone is weighing the possibility that you will default in your payments. They don’t want to take that risk in spite of the fact that you already have a security in place.

TIP: To avoid the high rates in finance charges, make sure to pay your dues on time each month. Don’t pay the minimum amount indicated on your monthly statement – pay the entire amount that you owe in full. You don’t incur additional costs and you improve your credit score that way.

Other fees than the deposit

Another drawback that you should know about is that you are also going to pay for other fees on top of the security deposit for your account. So, if a bank says you need to open a $500 time deposit to get a secured credit card you ought to know that there are other fees on the side other than the 500 bucks that they tell you about.

There are processing fees, application fees, and even annual fees that you need to pay for. Make it a point to inquire about these fees next time you discuss secured credit lines with a bank.

Remember that these fees will increase your total cost just to apply for secured credit. Do some smart shopping – ask three to five different banks that offer secured credit and go for the one that has the lowest amount of charges.

Few Perks

Another downside is that these cards have few if not zero perks. These types of credit cards usually have no rewards programs. However, there are some that do. It’s understandable why these companies offer very little rewards, if any. The level of trust is low with these accounts and that is all due again to bad credit history.

Don′t get in trouble

One last downside is the fact that you can still get in some form of trouble if you use this type of credit card. It’s pretty easy to get a false sense of security if you have one of these cards in your wallet.

It’s understandable! Once again you have a credit card in your possession. You will immediately feel like you are in the in crew again. If you default in your payments, you will still end up closing the savings account you opened in the first place.

If the money you owe is actually higher than the amount that was in your security deposit you may get a call from a collector for the said overages. These extra costs may come from interest charges and late fees, which you will still have to pay eventually.

Frequently Asked Questions

Here are a few common questions asked by people who are interested in getting a secured credit account.

There are banks that offer secured credit. They will have different terms. Credit unions also offer this type of credit card, which may offer lower interest rates. Some credit card issuers may even be willing to waive the annual fees – look into this each time you inquire.

The charges include an application fee, annual fee, processing fees, late fees, and others. Always check the fine print to find out all the possible fees a bank or credit institution may charge. Note that fees vary from one bank to the next.

The amount you need to pay as security deposit will vary from one bank to the next. The usual amounts include $200, $300, $500, and higher. Your credit limit will usually be within these amounts (sometimes higher). Note that if you have improved your credit scores since the last time you used a credit card, you may be given as much as a $2,000 credit limit.

The answer is no. You have to inquire whether a bank offers them or not. There are banks that used to offer them but no longer provide the service.

Unfortunately, the answer is no. Make sure to inquire whether they report to the 3 major credit bureaus before you sign up for a secured credit card.

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