02
Aug

secured credit card

If there’s one thing Americans love more than college basketball and hot dogs, it’s the convenience of their credit cards.

We are a nation of chargers – using plastic, of course – and recent estimates suggest that we collectively owe more than $1 trillion on our credit cards, part of the staggering $134,000-plus load of debt carried by the average American family

Many of us, however, are not so lucky to even be able to enjoy the flexibility and convenience of credit cards. Young people who haven’t had the financial experiences required to help establish their credit rating often find themselves locked out of the credit card world.

Secured Cards to the Rescue

Once a rarity, America’s debt crisis and the ever-growing numbers of consumers with credit issues has seen a massive growth in secured cards. They’re also beneficial to the “unbanked,” the millions of Americans who can’t afford or are unable to maintain simple checking or savings accounts with a major bank.

And consumers working to rebuild their credit after bankruptcy or other financial hardships also frequently find it difficult to be approved for traditional credit cards.

The past half decade has, as result, seen a tremendous growth in the world of secured credit cards. Their unique concept – a user deposits enough money to cover any credit card purchases – means that customers are able to set their own credit limits and make purchases without incurring any new debt or the frequently astronomical interest rates charged to those with low credit scores.

The real benefit of a secured card is the ability for an individual with no credit (or those with past credit challenges and a particularly low credit score) to slowly build their own credit rating, essentially using themselves as a guarantor for the credit limit.

But Not All Cards are the Same

Secured cards range widely in their costs and their rules. Some are virtually free, whereas others charge often significant fees to allow users the convenience of a branded Visa or Mastercard for use at retailers or for paying bills.

Deposits required to activate a secured card also cover a wide range, but generally $200 or $300 is necessary to begin receiving the benefits – though once the deposit has been made, a secured card will be accepted at all the same retailers or for all the same transactions as a regular unsecured card. Your deposited money may also not earn any interest, depending on the card, so check the details.

Interest rates vary widely, as well, depending on a user’s credit score, so expect a considerably higher APR if you’re re-entering the credit card game or if this is your first outing with a secured card.

Some allow free cash advances – again, consumers are only able to take out money they’ve provided as a deposit in the first place – while others are definitely limited in their use, with fees for anything but traditional purchases.

Many cards don’t even require a credit background check, helpful for customers who have particularly low credit scores or students or younger consumers who have yet to begin building their credit history.

Extending Your Credit Line

And, as an additional credit-building measure, others will allow cardholders to begin to make purchases slightly larger than the financial collateral they’ve invested.

Capital One’s Secured Mastercard, for instance, will allow qualified participants to access as much as $200 credit for as little as a $49 downpayment, with payments made in an installment plan to help reach the larger amount.

That $200 ceiling may not seem like much to those of us with sky-high credit limits, but for those with damaged credit or no credit at all, the convenience and flexibility of having a card for small purchases or daily expenditures like coffee or parking meters can be worth the effort.

Often, banks or credit unions will offer their own secured card as a benefit to their customers or members, providing a subtle opportunity for participants to gradually build (or rebuild) their credit rating.

Consumer advocates suggest customers be wary of the extremes of the secure credit card world. Some cards don’t automatically report a consumer’s activity to the three major credit bureaus – that, after all, being much of the reason for having a secured card in the first place – so customers need to carefully read that financial fine print when picking a card.

A good sign that your regular, on-time payments are indeed building positive credit is the arrival of some offers for unsecured cards in your mail. Again, you may not get the lowest interest rates possible, but as a credit newcomer or someone on the financial rebound, those offers can be a blessing.

How Do I Use My Secured Card?

Once you’ve been issued a secured card, you’ll enjoy the flexibility to make small purchases at retailers or online, pick up the tab for a small lunch with friends or pay a cell phone bill.

It’s critical that you pay your monthly bill on time, as that will keep you in the good graces of the issuer; the longer you make regular, timely payments, the more likely you are to begin to see your credit score increase.

Secured cards can begin to provide many of the same credit-building benefits as traditional credit card transactions, so be careful to maintain a low percentage of the overall debt available to establish an acceptable utilization ratio.

Experts also suggest that you only use a secured card as long as you have to. If you’re beginning to receive offers for traditional, unsecured cards, consider making the move to a traditional card, as you may be able to avoid the fees and limitations imposed by a secured card.

Secured credit cards are one way of getting a fresh start, but you can also investigate other professional opportunities for free credit repair help. And you can carry on the conversation on our social media platforms. Like and follow us on Facebook and leave us a tweet on Twitter.