To start an account with a secured credit card, you must pay a cash deposit to the credit card issuer. The amount you deposit or use to “secure” the account with a secured credit card will be equal to the line of credit you obtain. In other words, a $500 deposit will get you a $500 credit limit on your card.
What Are the Benefits of Secured Credit Cards?
Secured credit cards operate on one of the major payment networks, such as Visa, Mastercard, American Express, or Discover, and may be used to make purchases just like any other credit card. Secured cards, on the other hand, are created for people with bad credit or no credit.
Credit card issuers utilize prior credit history to establish eligibility and interest rates for their products, much like they do with other forms of loans including mortgages, auto loans, and student loans. Your credit score will determine the quality of your offers. Because a strong credit score indicates to lenders that you are less likely to fail or pay late, you will have a lower interest rate.
However, if you have no credit or poor credit, a lender may decide that you are too risky to apply for a credit card. Insert your password-protected cards. Lenders that are hesitant to give credit to borrowers who have had financial difficulties or have no credit history may be more ready to accept applicants for a secured credit card since it involves a deposit that can be confiscated if the bill is not paid. If the cardholder fails to make timely payments, the lender is protected by the deposit.
Each card has its own set of minimum and maximum credit limits, which normally range from a few hundred dollars to several thousand dollars, depending on the card limit and the size of the deposit you’re ready to make.
Secured and Unsecured Credit Cards: What’s the Difference?
Secured and unsecured credit cards are the two types of credit cards available.
Secured Credit Card
The majority of secured cards are meant to help you build or improve your credit. A secured card’s credit limit is usually determined by how much you put down as a security deposit.
If you consistently make on-time payments on a secured credit card, the lender may ultimately raise your credit limit or offer you an unsecured credit card with better conditions and perks. A secured credit card might be a fantastic option if you need to develop credit but can’t be accepted for an unsecured credit card.
Unsecured Credit Card
Unsecured cards, unlike secured cards, do not need a security deposit and are therefore riskier for the credit card provider. Those with good to exceptional credit are more likely to get approved for these cards. Annual fees, hefty interest rates, and the lack of a rewards program are some of the disadvantages of unsecured cards issued to consumers with bad to fair credit. There are a few decent unsecured cards on the market for individuals who are new to credit, such as students or those who are relocating to the United States for work. However, for people who have made credit mistakes, the available solutions may be too expensive.
The majority of unsecured credit card products available to those with fair to exceptional credit come with enticing rewards schemes, such as cashback, miles, or points on regular expenditures. There may be some unsecured credit cards available to folks with bad credit, but they generally come with exorbitant annual fees and may not provide you with a reasonable APR (annual percentage rate) on your purchases.
How to Obtain A Safe Credit Card
The first step, like with any other credit card, is to complete and submit an application. After that, the lender will do a credit check. A secured credit card application differs from an unsecured credit card application in that the former requires your bank account and routing information to process a refundable security deposit. The amount you put down becomes your credit limit, which is the maximum amount you may charge on the card.
A secured credit card operates exactly like any other card after your security deposit is accepted. Because secured cards require borrowers to provide collateral as part of their agreement with the card provider, pay off your debt in full every month to avoid paying hefty interest costs.
Your charges will display on your bill with an amount owing for that month, similar to unsecured cards. If you decide to cancel the card after a long length of time, you may be eligible for a refund of your deposit, provided your debt is paid off.
How To Improve Your Credit With Your Secured Card
On-time payments are one of the most important variables in determining your credit score, accounting for 35% of the total. Making on-time monthly payments is critical to establishing a positive credit history. The finest secured cards will disclose your payments to all three main credit bureaus (Equifax, Transunion, and Experian), allowing you to transition to an unsecured card later.
Another item to consider is your credit use, which may be particularly difficult if your secured card has a low credit limit. This is the percentage of your total outstanding credit card amount to your entire credit card limit, often known as your debt-to-credit ratio. Because credit use accounts for 30% of your credit score, it’s important to keep this in mind when using your card. This ratio should ideally be kept at 30 percent or less.
But this is when things become tricky. It may not be as difficult to keep a balance of $3,000 or less on a card with a $10,000 credit limit as it is to remain below 30%. On a $500 credit limit card, though, that’s only $150 in charges. To keep credit usage low, pay off any costs as quickly as possible, even if it’s before the end of the monthly cycle.
Improving your credit score is a process that takes time. A secured credit card might help you get closer to your objective. A strong credit score will save you money on most of your significant life purchases throughout the course of your life, so it’s a financial goal worth pursuing.