Secured Credit Cards
Secured credit cards have become very popular over the last decade and almost anyone trying to rebuild or establish credit has certainly googled these types of cards. However, how does a secured credit card work and do they have the same benefits of traditional non-secured cards?
What is Secured Credit Card?
Secured credit cards are simply cards (usually a Visa or MasterCard) with a credit limit tied to the security of an investment. For most secured cards this means a CD investment. For example, if you put $500 into a CD the bank will turn around and give you a credit card with a limit of $500 holding the CD as security deposit.
From a logical perspective you would think any bank would do this however this is not the case. There are very few banks that offer these cards and less than a handful who offer reasonable interest rates. Applied Bank is probably the best known secured credit card provider with an APR as low as 0% whiles others can charge you up to 20% of more.
There is no flaw in the logic of security here (If you default the bank has money secured to cover the bill) but credit cards are securities and sold much like mortgages plus banks have significant operating costs to establish and manage any kind of credit card program.
How can a secured credit card benefit you?
If you need to re-establish or build credit then a secured credit is practically mandatory. You can only get credit with credit so secured cards often provide a very quick way to obtain a credit card with a real line of credit that reports to the credit bureaus. Prepaid cards do not do this even though a lot of marketing today is for these types of cards. Prepaid cards are basically debit cards whereas a secured credit really is like any traditional credit card except the bank holds a security. You have a minimum payment, potential late fees, an APR and more.
What are the risks of a secured credit card?
The primary demographic of the secured credit card product are people who have (a) credit issues or (b) no credit so the biggest risk of having these types of cards is failing to use them responsibility. Making further mistakes to your credit or building a poor profile to begin can have much more significant damage to your credit score than by not having this trade line at all.
You also have to watch out for fees. Heavy dollars are spent advertising these cards but many still come with so many small fees that it can get terribly expensive to maintain even with limited usage. For example, some cards have a monthly fee, others charge you anytime to make a payment online. You need to always read and understand the terms and conditions of any potential card before sending money in.
What is the customer service like?
You would probably expect any credit card company to be open 24 hours and offer all the usual protections however secured credit cards do not all have the frills. Almost everyone does not include an 800 phone number, have limited hours only during weekdays only and forget about rewards.
Can I increase my limit on a secured credit card?
This will vary from one issuer to another. Although for most providers you can increase your limit by sending more money in. An unsecured line of credit increase is typically never available but you can increase the funds in a CD which will in turn raise your credit limit.
Remember, the whole point of having this type of credit card is often short term. Pay your payments on time and don’t max out your card. You can focus on all the thrills and frills when you qualify for a better card later.
Should I apply for secured credit card?
This certainly depends on your unique profile. If you can qualify for a typical non-secured card then there is no reason to have a secured one. However if you need to build or re-establish credit then a secured card is almost always the best way to go.