Secured Credit Cards: What Are They?

Secured credit cards are different from normal credit cards as they require a deposit which is usually refundable if the card is used responsibly in order to be granted the card. These type of credit cards are usually used by people with bad or no credit in order to help improve or establish a credit history since these cards report your payment history to the 3 major credit bureaus. So when you use these cards responsibly you’ll be helping improve your credit score. Once you improve your credit score you may qualify to better credit cards (both secured and unsecured) with lower interest rates and other types of financial assets such as loans that you wouldn’t be able to qualify for if you have a low credit score.

When you have a bad or no credit history you are seemed as a “risk” by financial institutions, which is why they are a lot more willing to grant you a credit card once you make an upfront deposit. This upfront deposit allows them to feel more comfortable that they won’t lose money if you suddenly stop paying your credit card bills. In a lot of cases the deposit you make ends up becoming your credit limit. For example: if you deposit $100 to your secured card your credit limit would be $100 a month (this varies by card).

What happens to your deposit and credit score if you use your secured card responsibly? If you use your card responsibly most cards will refund your initial deposit and after 6-12 months your credit score may increase enough where you can qualify to higher credit limits or better credit cards. A lot of secured credit cards will allow you to automatically upgrade from a secured card to an unsecured card after some time of showing you have used your secured card responsibly.

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Advantages and disadvantages of having a secured credit card?

Advantages:

  • Secured credit cards report your payment history to major credit bureaus, so if you use the card responsibly this will help improve your credit score.
  • These type of cards help people with bad or no credit to have access to a credit card.
  • Some secured credit cards count with cash back programs that can help you save some money on purchases.
  • Most secured credit cards refund your initial deposit if you use the card responsibly.

Disadvantages:

  • Low credit limits and the need to make an initial deposit in order to be granted the card.
  • You still accumulate an interest on any unpaid balances (as you would with a normal unsecured credit card).
  • Some secured credit cards have annual costs (try applying to secured cards with no annual costs first).

How to use a secured credit card efficiently?

In order to increase your credit score as well as getting the most out of your secured credit card make sure to use your card responsibly by following these tips:

  • Use your card on a monthly basis but make sure to not buy too many things with it. Best practice is to use less than 30-50% of your credit card’s credit limit every month.
  • Pay the full outstanding balance of your card every month on time in order to maintain a good payment history and to avoid incurring an interest on your unpaid balances.
  • Check your credit score from time to time to see if your score is improving. Once it has improved significantly you can speak to your credit card issuer and see if you qualify for higher credit limits or an unsecured card all together.

A lot of people notice a significant improvement in their credit score after 6-12 months of using their secured credit card responsibly, but this varies by person. Once your score has improved significantly you can reach out to your credit card issuer to see if you qualify to a higher credit limit or an unsecured card. You can also look at other credit card companies, but the best practice would be to keep the same account open as it will help your credit score.

Difference between secured credit cards and prepaid cards?

Secured credit cards and prepaid cards can sound similar, but they are very different. With prepaid cards you are using your own funds in order to make a purchase, while with secured credit cards you are using a loan from the credit card.

Since prepaid cards are not actually using credit to make purchases, payments made to your card are not reported back to credit bureaus so it will not help you improve your credit score.

If you are looking to establish or improve your credit score, secured credit cards are better for you than prepaid cards.

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