Credit cards have become the backbone of many people’s lives.
They allow you to spend up to a certain limit and give you a ‘free’ period before you need to pay that balance back and before your balance starts accruing interest.
They also allow you to do things like hold a deposit against a rental car which can be trickier (or impossible) with debit cards, depending on your banking institution.
To be eligible for a credit card you need a good credit history. You can build one up by paying all your bills on time, having long term credit cards and meeting all your payments for a loan. If you miss a payment on any of these items, you get a negative mark on your credit history that can take years to disappear.
For anyone with a poor credit history, or simply no credit history at all, it can be difficult to qualify for a credit card. In this case, you can opt for a secured credit card which will allow you all the benefits of a credit card, and build up your credit score at the same time.
Secured vs. Unsecured
Most credit cards are unsecured, meaning there is no asset listed against the card and you can draw down any amount the bank deems appropriate during your initial application.
Secured credit cards, on the other hand, require you to put down a cash deposit, and in most (but not all) cases the amount you put as a deposit will be set as your credit limit. Some institutions will offer a higher limit, and some will offer interest on your deposit, so check the fine print to see what suits you.
The number one draw of a secured credit card is to rebuild your credit score so you can get better financial products. There are three major credit bureaus in the United States. A card that reports to all three credit bureaus will increase your score quicker, while a card that doesn’t report to anyone won’t increase your score at all.
As mentioned, all secured credit cards require you to pay a deposit. When you’re in a financially tricky situation, it can be hard to find the funds for this. Search for a card with a lower starting deposit, and keep in mind that many institutions will let you add to this amount moving forward.
As with all banking products, there are fees to watch out for. If you aren’t careful in choosing your company you can end up paying fees that wipe out you deposit within a few short months. Steer clear of application fees wherever possible, and if you do choose to pay them make sure the benefits of the card outweigh the initial buy in costs.
Lastly, most secured cards will charge higher interest rates and offer minimal rewards. This means that secured cards aren’t a long-time financial product, but something that can be highly useful in the right circumstances.
While there are many downsides and your credit line is limited by the amount you can deposit, secured credit cards are an excellent tool for getting back on your feet, or taking your first steps into building a credit score.