What is a secured credit card
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.
Why should you consider applying for one
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.
How to utilize it
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.
- Make small purchases. It is important not to go crazy when getting any credit card, let alone a secured one. If you are tempted to splurge at the makeup counter or buy a new a pair of shoes, don’t. One of the tips we will go over is to pay your card in full every month and one way to ensure that is to make sure you are making small purchases. A small purchase can be a coffee at Starbucks as a Friday treat once a week or charging a small utility bill such as phone or internet. Try not to charge the full amount of the card every month because then it will look like you are maxing out your credit utilization rate. Maxing out your card will hurt you.
- Pay on time. It is important to pay any bill on time but especially a credit card bill. Once you have a late credit card payment, you will be charged interest and will have a late fee. Credit card interest and late fees vary based on the lender and the type of credit card you have, but it could add up. With a secured credit card, it can be worse. Since the bank has your cash deposit as a form of collateral, they can use it towards your balance if you are late.
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.
- Pay off your balance every month. Pay off all purchases every month in full. Paying your purchases off will help you avoid paying interest on any items and look good to your financial institution and the credit bureaus who they will report your credit history and account to. Paying your balance off every month is important, which is why it’s advised you to start with small purchases or expenses you will be able to pay in full.
- Make multiple payments. Making multiple payments is also important when working with a secured credit card. By making multiple payments and paying off your balance, you will be showing the bank that you are taking your finances seriously. This helps your chances of being offered an unsecured credit card in the future.
Things to keep in mind when using a secured credit card
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.
- Have a plan to pay it back. Harlan Landes from Adulting.tv explains there are dangers if you are not responsible with a secured credit card. “It’s important to consider if something happens and you can’t pay it back. Or you could afford it initially and no longer can. You could end up losing your deposit, owe more money or get an even higher interest rate because of it.”
- Look ahead with confidence. To fully build your credit again with the means listed above, it is important to ensure you are in a sound financial place with some financial basics secured. Making sure you have consistent full-time income would be a major financial basic. Also make sure you are already utilizing a spending plan or budget and not living out of your means. And last but not least, make sure you are organized and keeping track of your bills.
- Move into an unsecured line of credit. The whole goal of building your credit with a secured card is to help ensure you can be considered later on down the line for credit cards without a deposit. If your bank does not offer this, keep an eye on your credit score and as it improves, shop around for your options.
The bottom line
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.