If you’re like most people, your credit score is one of the most critical numbers in your life. A bad credit score can make it tough to get a loan, rent an apartment, or even find a job. But there’s no need to feel helpless. A secured credit card can help rebuild your credit rating. So how do they work? Keep reading to learn more.
What is a secured credit card?
Let’s start with a simple definition: a secured credit card is a credit card that requires the applicant to deposit a refundable security deposit as collateral until the account is terminated. Secured credit cards are one of the most popular types of credit cards. They have a high approval rate and frequently low annual fees.
The most significant difference between a secured credit card and an unsecured credit card is that, while the former may give you borrowing power, the latter does not. The majority of secured credit cards are fully secured, which means your spending limit will equal your deposit amount. Because you’re not borrowing anything, even individuals with troublesome credit can obtain a secured credit card.
How do secured credit cards work?
While the fundamentals of a secured credit card appear simple, anything that affects your credit score must be thoroughly understood. Let’s have a closer look at the secured credit card process, so you’ll know everything to make an informed decision about whether or not to apply for one.
- A security deposit is required. When precisely a security deposit is required differs with each card issuer. Some secured cards require a deposit when you apply, while others only ask for it after you’ve been accepted. The majority of secured cards need a minimum $200 or $300 deposit. Most secured credit card security deposits are paid by transferring money via bank transfer or debit card. A credit card may not be used to pay the security deposit on a secured credit card.
- Your security deposit is your spending limit. When you make a security deposit, your spending limit is automatically set to the amount you can comfortably afford. This protects you from exceeding your credit limit and paying interest on more than you can afford over time, which is beneficial to both you and the lender in the long run. In most situations, if you have a good payment history, you’ll be able to add to your security deposit over time, giving you greater purchasing power.
- A secured credit card parallels a “normal” credit card. A secured credit card will most likely bear the Visa, Mastercard, Discover, or American Express logo. As a result, you may use the card wherever the card brand is accepted and spend up to your limit. You’ll be required to pay your bill on time each month, plus any balances carried over from month to month will earn interest.
- The security deposit is returned once the account is closed. A nice aspect of a security deposit is that it is refunded when the card is canceled. To get funds back, be sure to zero out any outstanding balance. Expect to receive a check or bank transfer refunding your security deposit after the account is closed.
You should be eligible for an unsecured credit card after responsibly using your secured card for at least 12 months. Your secured card provider may even reimburse your security deposit and convert your account to unsecured. If you do not want to close your secured credit card, be sure that the annual or recurring charges are low. Keeping your secured card line open might raise your credit score by making it appear that you have a more extended credit history. However, if you qualify for a credit card that offers better rates daily, use it.
How do I find the best secured card?
The objective of obtaining a secured credit card is to rebuild and increase your credit score. As such, be sure the card issuer you choose reports your timely payments to all three major credit bureaus. Some additional perks you might be eligible for include:
- Competitive interest rates
- No annual fee
- Online payment options
- Mobile applications
Most likely, you’ll be bombarded with secured credit card offers once you start looking around. Take time to learn what perks are essential to you and select a card that aligns with your expectations.
What are secured card alternatives?
So now you know all about what a secured credit card is and how it works, but is there a better option for you? Your credit score, accessible collateral, and how willing others are to assist will all influence the most straightforward answer to this question. As you’re gambling with your future financial well-being, be sure to weigh the pros and cons of all alternatives before making a decision.
Alternatives to a secured credit card include a secured personal loan, an unsecured credit card for bad credit, and becoming an authorized user on someone else’s card. Each option can help increase your credit score if repaid on a timely basis. Let’s dig further into each option.
- Secured personal loans usually come with a lower interest rate than a secured credit card, and you may be able to borrow a more considerable amount of money. In exchange for putting your car or home up as collateral, you will get a lump sum of money. Because the collateral protects the secured personal loan lender, they frequently don’t have a minimum credit score requirement.
- Unsecured credit cards for bad credit are similar to regular credit cards. You are not required to put down any collateral. However, they have some significant differences. The main disadvantage is that they are frequently pricey and have low credit limits with little perks.
- Becoming an authorized user on someone else’s credit card gives you access to their credit line to make purchases. As an authorized user, you will have all of the card privileges as though you were the primary cardholder – without having to go through a hard credit check. Furthermore, if the account is used responsibly, you will develop a good credit history. When going this route, it’s also important to work out a payment plan with the primary cardholder, as they are ultimately responsible for your purchases.
Is a secured card right for you?
All in all, secured credit cards are a fantastic place to start for individuals who want to establish or repair their credit. At Credit Card Chest, we have several secured credit card options that can fit your needs. Our team is here to help you find the best card for your situation and guide you through the application process. Don’t let poor or no credit keep you from enjoying the convenience of a credit card.
Apply today and get on the path to better credit!
