A secured credit card is different than a regular credit card in a few different ways. When a financial institution extends you a line of credit with a regular credit card, they do not require a security deposit to make sure you will pay back.
Your limit and interest rates for your credit card are also affected by your credit score. When your credit report reflects negative financial decisions such as a repossessed car or delinquent loan payments, you are given a lower amount and higher interest rate. It is not in the bank’s best interest to lend to you given this information, and they need to ensure they will be getting some if not all of their money back.
A secured credit card follows the same guidelines as an unsecured credit regarding payment, interest and limit procedures but it differs with a deposit. A financial institution that is extending you an offer for a secured credit card is interested in lending you money, but hesitant they can even make their money back with a higher interest rate. Because of this, they are willing to issue you a card if you put a deposit down, which requires the use of your own money. If you are late even once, they have the option to take your deposit to cover unpaid amount, including penalty and fees, and move on. Your credit limit is usually the deposited amount. So, if you are required a three hundred dollar deposit, then it would be safe to assume that your credit limit will be three hundred dollars. Some secured credit cards require lower deposit than a credit limit.
Amanda Abella, Millennial Business Coach, states that a secured credit card could be good for building credit when you have none. “My brother used a secured credit card when he had no credit. Within a few months, he was able to qualify for an unsecured credit card with a higher limit because the secured card helped him build his credit quickly.” Secured credit cards show the three big credit bureaus (TransUnion, Equifax, and Experian) that you are establishing good financial habits.
Developing good financial habits with the credit bureaus by using a secured credit card may also be in your favor if you have destroyed your credit or have a poor credit score, which is anything usually considered under a 620. Delinquency on student loans, foreclosures, repossessed cars and medical bills in collections can all have a negative effect on your credit score. When I was twenty-one years old, I had a car loan I could not realistically make payments on that ended up being repossessed. Looking back on the situation, there were options for me, but I was stuck in my mindset that I did not actively do anything about it. That car loan haunted me for years, all the way until I got a new car and paid it off in full.
If you decide a secured credit card is best for you at this time in your life, there are ways to make sure you are using it properly to help you move on to an unsecured card once your credit score has improved.
Put a reminder on your phone or on a calendar to make sure all payments are up to date. How do I make sure to pay my credit cards on time? I assign them to a paycheck (I get paid bi-weekly) and pay them that payday. I also have organized it with my lenders that all of my credit cards are due around the same time of the month (the 15th). My rent takes a big chunk of my first paycheck of the month, so I prefer to pay these with the second.
We’ve already established that using a secured credit card could be an excellent way to help build your credit if you have none or to re-establish your credit if you have gotten off track. But, there are also important things to keep in mind when using a secured credit card.
Credit doesn’t have to be complicated, and you can start over with a little bit of work. By opening a secured credit card, you have the chance to build or rebuild your credit by having a financial institution report to the three major credit bureaus behalf. You do not have to stay with secured credit cards forever and can eventually move to one with the perks that unsecured credit cards offer.
Your deposit can and will be refunded to you if you follow our advice as outlined above. Your credit score is one of the most valuable financial tools you will have. Treat your secured credit cards responsibly and then reap the benefits.