What Is A Secured Credit Card?
A secured credit is a credit card that is secured by a cash deposit. If you have no credit or bad credit, it can be used as a tool to boost your score.
To get a card, you need to put down a cash deposit. This deposit is held by the credit card issuer and they can use the money if you were to default on a payment. A secured credit card does not work like a debit card. The deposit that you put down is only touched if you default on your obligations.
Because of the deposit required, a secured credit card is much easier to get. This is not to say that everyone who applies for one will be approved. You will still likely be required to have a bank account and meet a few other criteria. That being said, if you have the money to put down, you are likely to get approved.
How Does A Secured Credit Card Help?
Secured credit cards fill in the gap left when someone can not qualify for a conventional credit card. Without these cards, those with no credit might be unable to establish themselves. Likewise, if you have bad credit conventional revolving credit is probably not available to you. A secured card can allow you to get back on track.
Just like with a regular credit card, you get from a secured card what you put into it. If you use it and pay your bill on time, the card issuer will report your positive activity to the credit card bureaus. This will, in time, increase your credit score.
For best results, remember to keep your credit card utilization in line. This means that you should be using no more than 30 percent of your available credit. Even better is to keep your utilization under 10 percent.
By keeping your credit card in good standing and the balance low, your score will increase, because these are the two factors that most impact your credit. On time payments and credit utilization make up about 66 percent of your total credit score.
How Is Your Credit Limit Determined?
So, just how much of a credit limit can you get?
In most cases, your credit limit will be determined by the deposit that you put down. A 200 dollar credit limit will be secured with 200 dollars in deposit money. A 500 dollar card will be secured with 500 dollars in deposit money.
Sometimes your deposit will be put into an interest bearing account, but more often than not, you will not make interest on your deposit. It is just one of the ways credit card companies make money and why they offer these cards in the first place.
The good news is that if you pay your bills on time and use your card responsibly, you may be able to qualify for a credit limit increase. Not all secured cards will offer this however and by the time they do, you might be able to qualify for a traditional card with no deposit.
When Do I Get My Deposit Back?
In the vast majority of cases, you will only get your security credit card back if you close the account or default. Close the account and you will get every dollar of your deposit returned to you. If you default, your card issuer will deduct what you owe from the deposit and refund you the remainder.
Some card companies do offer the perk of switching you to a regular card, once you have proven yourself. If so, they will return your deposit once you have been upgraded.
How Much Will A Secured Card Cost?
Just like with any card for bad or no credit, the cost will be higher than the average consumer pays. You can expect the interest rate to be higher, likely close to 29 percent. You should also expect an annual fee, typically less than 100 dollars. Other fees like late fees will also likely be on the upper end of the limit. There is no doubt about it, a secured card will be higher than most unsecured cards, even with the deposit.
Should You Get One?
Now that you know a few of the odds and ends of getting a secured credit card, let’s sum it all up and decide if you should get one.
Pros
- Can help you establish or fix credit.
If you have no credit or bad credit, it is one of the easiest ways to boost your credit score. - Easy to qualify for.
The vast majority of applications will get approved as long as you have a checking account and the deposit. - You get the money back.
Eventually, you will get the money back. That might be when your card gets upgraded or when you close your account after establishing yourself.
Cons
- You have to put money down.
You have to place money down which is held. Money you might be able to use for other credit repair, like settling old debt. - Fees and interest are high.
Interest and fees will likely be at or near the allowable upper levels.
Overall, if you can qualify for an unsecured credit card, this would be the way to go. Otherwise, a secured card is not a bad deal. You can use it to build or re-establish your credit and then likely qualify for an unsecured card in the near future. Just be sure to pay off your balance each month to avoid the high interest charges.
