Why Would You Use Secured Credit Cards?

While there used to be a time when cash was king, this is no longer true in today’s society. While cash can still be used at a number of places, there are some areas where you are required to have a credit card. For example, you cannot rent a car without a credit card. Credit cards are absolutely necessary for some transactions but for others it is a great convenience. Shopping online or via telephone, paying bills and more are all made more convenient with the use of a credit card. However, in order to obtain a credit card you have to have a good credit score and reliable income. If you don’t have good credit though are you doomed to a life without a credit card? No, secured credit cards can help you.

What Are Secured Credit Cards?

Secured credit cards mean that you give collateral to guarantee payment of the loan. If you default on payment, the collateral will be used to make the financial institution whole. This means that secured credit cards hold very little risk for the bank. Even though there is no risk many banks do not carry secured credit cards. So, you have a few to choose from. Most have decent terms, though, so you should be able to get secured credit cards without outrageous collateral amounts.

Secured credit cards use cash as collateral in the form of a deposit. The deposit amount you make determines the credit limit you have. For example, if you deposit, $200 you credit limit will be $200. You can make purchases up to the credit limit amount and then you need to pay back the minimum amount due each month or pay it off in its entirety. If you fail to pay off the amount, your deposit will be used and you may forfeit it entirely depending on the terms and conditions.

What Fees Are Associated with Secured Credit Cards?

Just like any credit card, secured credit cards have particular fees. To begin with you may be charged a one time processing fee. This is to account for setting up your credit card, taking your deposit and processing everything necessary to get your card to you. After that, many secured credit cards have an annual fee. This is a once per year payment that is made for the privilege of having the secured credit card. These set fees are typically the ones you will see on secured credit cards that may differ from standard, non secured credit cards.

Secured credit cards then have fees just like regular credit cards, most notably an interest rate. Because secured credit cards are typically gotten by those with no credit or poor credit, there is a penalty involved and that penalty is in the form of a higher interest rate. However, if you pay off the credit card each month this will not be an issue. If you carry over a balance, you will have to pay the minimum amount due and interest charges will accrue on your unpaid balance. There are also usually over limit fees, late payment fees and insufficient funds fees that are applied if needed.

Are Secured Credit Cards Worth the Trouble?

For those who have poor credit but a stable job, secured credit cards can be a great idea. Of course, they allow you the freedom to purchase conveniently all over the world. But in addition to this, it helps rebuild your credit. If you pay regularly you will start showing a positive payment history on your credit report. This will increase your credit score and show improvement for other credit you may need in the future such as for buying a house or vehicle.

Secured credit cards have the added advantage of turning into an unsecured credit card after a period of time if you have a good payment history. This will further bolster your credit rating. Most banking and financial institutions use a year to 18 months as the guideline for positive payment history though some may even decrease it to six months. After the required amount of on time payments, many secured credit cards will refund your deposit or apply it to your balance and then you can spend it how you want, and continue paying without a deposit.

You will typically keep the same credit limit and then it may be increased gradually on the non secured credit cards as on time payments continue. Or, you may get partially non secured credit cards after a time. For example, if you make a $200 deposit and have a $200 credit limit and after 6 months you have not missed a payment you may get an increase in your spending limit for a partially un secured credit card. Your credit limit may be raised, for example, to $250 but you only have $200 of that secured.

Cautions on Secured Credit Cards

As with any financial venture there are things you should be aware of. Read the fine print. Often people with poor credit are desperate and take the first credit card offered to them. However, not all secured credit cards are the same. Some have exorbitant monthly or annual fees and you get nickeled and dimed so much that it is no longer worth it to have secured credit cards. There are plenty of secured credit cards that are fair and while you may pay a little more, it is not too terrible. Other secured credit cards, though, take advantage of the desperate straits a person is in and you end up paying more in fees than you get in benefits.

So, when looking for secured credit cards shop around and get the best possible deal. Be prepared to pay a higher interest rate and possibly a one time fee and annual fee. However, these should not be so high as to seem unreasonable. If you feel they are, you will likely be able to find secured credit cards that are fairer to you and will help you grow your credit score and quality for a non secured credit card.