Secured credit cards are a good way for new credit users to build credit. And for credit users who endured some challenges to rebuild credit — although that is not as common lately. With a secured credit card, the issuer (a bank or a credit union) asks you to leave money on deposit with them, and not withdraw it, and in return, they will give you a credit card with a limit equal to that amount. By managing the secured card properly, you begin to build a favorable credit profile. After a period of time with good credit behavior, your bank, and other financial institutions will be more inclined to issue you a regular card.
While there are a lot of advantages to getting a secured credit card, there are also some drawbacks. If you decide to get a secured card, you should only consider a card from your own bank, or at least a bank you are familiar with. And make sure you know all the details.
One advantage of a secured card is easy approval. As you know, when you are first starting out, it’s not easy to get that first card, and the more denials you get, the worse it looks for you. Other advantages include establishing a credit history and building a favorable credit profile. You will also put away an amount of money that you will earn interest on and cannot spend. And if worse comes to worse, that money will cover your bill — but don’t do that!
There are some disadvantages, though. First, you do have to tie up your funds. If you already have some bills, you’re better off paying that first, before charging more. Second, some secured cards have fees, and severe penalties if you default. It’s a commitment, and you want to be sure you can use the card wisely. The rates can also be unreasonable. When you add up the fees and the interest, it usually exceeds any interest the bank is paying for your money, which is frozen.
Worse case, you can end up owing the bank a lot of money, and you risk losing your deposit if you get in over your head. Add to that, a negative report to the credit reporting agencies. Some people might consider the strict guidelines are an incentive to make sure you use the credit card wisely, and that’s partly true. But there are issuers who will take advantage of your situation.
A secured card, despite the disadvantages and potential pitfalls, is a good tool for building your credit profile for the first time, or for rebuilding a damaged credit history. Recently, however, some banks are backing away from those who have gotten themselves into trouble with credit.
But like all good tools, a secured card is best when it is used wisely, and for its intended purpose. If you get a secured card, don’t go crazy. Buy a few things, and pay the bill off every month. This will display your intent to manage your credit, and that’s what credit issuers look for.
At least, the good ones do.