As a modern-day consumer, it can be difficult to make ends meet. With our society's current economic state, many individuals are struggling to repay their debts and find affordable credit options that they can use responsibly.
Secured credit cards seem like the perfect answer for this dilemma; with these cards, consumers must provide collateral in order to obtain a line of credit. However, there are some pros and cons of secured credit cards - read on and learn more!
A secured credit card is a type of credit card for which consumers must provide collateral (in the form of cash, stocks, bonds, or other financial instruments) to obtain their line of credit. The amount a consumer can borrow with this card will be based on the value of their security deposit.
When a consumer makes purchases on their credit card, they will only be able to spend the amount that they have put down as collateral. Essentially, this prevents a person from overspending and getting themselves deeper into debt.
A secured credit card is a revolving line of credit. This means that the person can take out or borrow money whenever they need it - and pay it back when it's due. However, the maximum amount that a person can spend on these cards will be determined by their credit limit and collateral deposit.
It's like any other credit card, except you're required to put down a deposit that will be used as collateral for your purchases.
With secured credit cards, the amount of time it takes to build or rebuild one's credit is based on how willing and responsible they are in repaying their balance each month.
Secured credit cards provide many advantages. These include:
- You can build or rebuild good credit. With a secured credit card, you have the ability to build and rebuild your bad credit history. Note that if you are a new consumer with no prior credit history, you should first try to acquire a store or gas card before applying for a secured credit card.
- You can help improve your FICO score. With secured cards, just by using them responsibly and paying your bills in full and on time, you can improve your credit score. A secured card is just like any other form of credit; with responsible use, this will positively affect a consumer's FICO score.
- You can get approved for an unsecured card. If you pay your secured card off consistently and avoid maxing out your line of credit, you will be rewarded with an unsecured card in the future. Many people are able to receive a card with no deposit and an even higher credit limit after they've shown responsible use of their secured line.
-You can earn rewards. Some credit card companies offer rewards to their customers. Most of these rewards are cashback on purchases, but some cards even come with points that can be redeemed for merchandise or travel tickets.
-There is no risk to signing up. When applying for a secured credit card, there is no risk to the consumer - if you are denied, you will not be charged any fees.
When examining the pros and cons of secured cards, ensure that you know what you're getting into before applying. Here are some potential downfalls:
- You must put down a deposit to establish your line of credit. In order to qualify for a secured card, you will need to make a security deposit. The amount needed for this is usually equal to what you want the credit limit to be.
- You must be careful with your spending. When you have a secured card, it's important to keep tabs on what you're charging. If you make a purchase and it takes you over your credit limit, the creditor can hold you responsible for additional fees.
- It could take years to become unsecured. Typically, if you use your card responsibly over several years, you will be able to get rid of the security deposit requirement and earn an unsecured card. However, depending on the state of your credit, this can take several years.
- You may have to pay a higher interest rate than you would with an unsecured card. Secured credit cards tend to have higher interest rates. If you are carrying a balance, it's likely that you will pay more in interest charges than what the card offers in rewards or cashback.
-You may have to pay other fees. The issuer may charge you an annual fee, maintenance fees, or late fees. Before you sign up for a secured card, ensure that you're prepared to pay these fees if needed. You will likely have to pay a higher annual fee than with an unsecured card.
You should always pay your card in full each month to avoid interest penalties and fees. If you can't afford the total balance, it's best to pay as much as possible so that you don't end up with a higher balance than when you started.
Get in the habit of checking your balance each month so that you know how close you are to the available credit amount.
It's probably a good idea to keep about 50% of your total card limit as free and clear space at all times. If you find yourself low on funds, pay down the balance or stop charging until you have more available credit.
Your lender will be able to recommend a company that can check your credit for you, or you can find one online and run the report yourself.
This is important because checking your own credit keeps it confidential and also alerts you in case of identity theft. If there are mistakes on the report, contact the lender immediately so that they can fix it for you before someone else tries to take out credit in your name.
When you make on-time payments, it shows lenders that you can handle debt responsibly and therefore help your overall credit score. This may mean that you are able to get an unsecured card in the future if your current one becomes secured again.
Secured cards are ideal for those who have good or excellent credit but want to improve it further.
If you don't have a lot of money saved up and don't want to risk your money by using it to pay off the card debt, then this is an option you should consider. secured cards are also great for building credit history if you have had financial problems in the past.
Applying for a credit card is much like applying for a loan. You will need to provide proof of income, your social security number, and your address to get started. You'll also need to have a checking account so that you can pay your bills on time. Once you've applied for a secured credit card and been approved, your card will arrive in the mail.
Opening up a secured credit card is not always the best option for every individual. There are other options you can explore, such as signing up for Kovo’s wellness program to get the financial education that you need in order to learn about your different options and improve your life skills with regards to finances. Find out more here.