When most people think about – or hear about – secured credit cards, they begin to think that a secured line of credit can only be used by people with a bad credit score -it’s not for anyone other than that group of people. That conception isn’t necessarily true! Secured lines of credit aren’t just for people with bad scores – it’s for people who don’t have any score, like students or internationals who don’t have any credit history within the United States. Secured credit cards aren’t just for people with bad scores: it’s for people who are just starting.
So How Do Secured Credit Cards Work?
You place in a security deposit which acts as a form of collateral should you have to default on your payments. Your credit limit on the secure card? It’s based on how much money you deposit. Makes enough sense, doesn’t it? How much credit you get depends on the particular lender, but it normally is between 50% and 100% – sometimes it goes a little higher, but you can expect to be getting somewhere in the above neighborhood of your deposit in credit. (So if your lender offers a 50% rate and you put in $300, you have a credit limit of $150.)
Whatever your circumstances are, a secured credit card can be the right choice for building up your credit for a good financial future. Because you’re taking the risk and responsibility by way of the security deposit, and not the lender, it’s easy to get approved to begin building you score. If you’re worried about what people think – don’t! It’s not as if a secured credit card really looks any different from a normal credit card.
What Card Should You Get?
If you look around, you’ll find people offering secured lines of credit. The organizations that do are everywhere – banks, major lenders and even credit unions probably offer one. What you want to keep an eye on is the fine print: while a secured line of credit can be a smart investment for the future, if you aren’t careful, it can cause more harm than good. Make sure the card reports to every credit bureau in the US (Experian, TransUnion and Equifax) and make sure the APR isn’t so high as to break the bank.
Be sure to apply a little bit of common sense – look for incentives for your future, the lowest rates you can find and the best sort of fee structure. It’s more important with a secured credit card – because all of the benefits that these companies offer are usually tied up in prime (that is, traditional) credit cards.
Start reading into the contract Look at the fees, interest rates, the function of grace periods and other kinds of costs that you wouldn’t normally have to deal with – and look for what will help you in the future.
- Does the contract allow you to increase your line of credit over time if you are responsible, and does it have a fee?
- Will lender allow you an ‘upgrade’ to a traditional line of credit over time, and will it cost you?
- Does the card give any kind of interest or benefits like deposit, points or miles?
Mistakes to Avoid with Secured Credit Cards
A secured credit card is not the same as prepared cards! The deposit made when you are approved for the card is not used to pay off your credit – you need to pay from another account on your credit every month in order to keep your fees from lagging. As always, remember to read the fine print: see what happens to the security deposit after you close the account. You might only get some of it back, you might get all of it back, but be sure that you know what!
Keep an eye on your interest rate! The annual rate is often lower if there are a lot of upfront fees in order to apply for the card, and higher if the initial cost is cheaper – and the lender might ask for different fees depending on their own mode of operation.
Remember that on a secured credit card you cannot negotiate fees. They ignore the credit score entirely – whether you have a great line of credit or a bad line of credit or no line of credit, the fees of a secured credit card don’t take that into account. Also keep in mind that chances are you won’t be getting rewards or benefits for the secured card – look forward to that in the future.
What It Means:
Secured credit cards can be a good way to first build or to rebuild a score of credit – and it’s a slow process. Remember to be patient, and remember that a secured line of credit isn’t a magical, instant fix: it’s something you will have to use responsibly for it to reflect well on your score.