The Secured Credit Card Choice
Credit cards are popular for many reasons. They are convenient and versatile. They allow you borrow money to buy now the things that you may not actually have the money for until later. They also help you to build up your credit rating.
But what if your credit rating is in trouble – or doesn’t exist yet? If you find yourself with a low credit score or no credit history, you may find that you can’t qualify for a regular credit card. That’s when it’s good to know that there are other options available.
One of those options is a debit card. Debit cards offer the same convenience of credit cards, but they are actually linked to an account, usually your checking account, that already contains money. In other words, there is no real “credit” involved because the funds being used have, in a sense, already been paid. That is a good thing if you want to avoid creating more debt, but it will not help you if you are trying to establish or raise your credit rating.
Secured credit cards, on the other hand, do help to build good credit. While these cards will usually show up on a credit report as a secured line of credit, which is not as good as an unsecured credit line, it is still far better then having no credit cards when it comes to establishing or building your credit.
A secured credit card is issued to you after you deposit a certain amount of money into a secured account to be used as collateral. While this money will be used to pay off your secured credit card if you default on the account, as long as you make your payments in full on time, the money that you deposited as collateral actually remains yours and, in most cases, actually earns interest. In the meantime, but establishing a pattern of timely payments, you are creating a positive credit history for yourself, which will in turn serve to either establish or improve your credit rating. In addition, while your credit line will most certainly be only as much as your intial deposit of collateral when you first get your secured card, the bank may raise that limit as you show that you can be counted on to use your credit responsibly. Eventually, they may even offer you an unsecured credit card or convert to a fully unsecured credit card after the card has been properly managed for a certain period of time.
One drawback to secured credit cards is that most of them do have an annual fee. This is another way for the card issuer to reduce their risk, which is understandable given that the people applying for these cards are usually rated as either high or unknown credit risks.
Also, as with any credit card, you should pay attention to the interest rate and other fees of the secured card. If you can find more than one bank willing to offer you a secured credit card, be sure to compare the offers including interest, fees, and other terms.
While secured credit cards may not have all of the advantages offered by an unsecured card, they can still be a valuable financial tool, especially for those trying to improve their current credit or establish their credit for the first time.