5 Benefits of a Secured Credit Card (and 3 Drawbacks)

Getting a credit card is hard when you have bad credit or no credit at all. The trouble is, you often need a credit card to start building a good credit history. If you can’t get approved for a traditional credit card, a secured credit card is a better option.

What’s a Secured Credit Card?

A secured credit card is different from “regular” credit cards in that you’re required to make a deposit to get the credit card. This deposit serves as collateral for the purchases your make using the card. If you default on your payments, the card issuer keeps your deposit.

Your card will have a credit limit between 50% and 100% of the deposit. You can use the secured credit card just like you’d use any other credit card – swipe it for purchases and pay your bill on time.

5 Good Things About Secured Credit Cards

  1. You can get approved for a secured credit card when you can’t get approved for a traditional credit card. Paying the security deposit gives the card issuer incentive to accept your application.
  2. They typically report to credit bureaus. Unlike a prepaid credit card which lets you spend like a credit card, a secured credit card reports your payments to the credit bureaus to be included on your credit report.
  3. A secured credit card can help you establish or re-establish your credit. Since payments are included in your credit report, paying on time will help improve your credit score.
  4. Your security deposit is used if you default on your payment. Unless you spend over your deposit, you won’t get sent to collections for defaulting on your payments. Though the card issuer will keep your deposit, you don’t have to worry about debt collectors hounding you for missed payments on the card.
  5. You can earn interest on your deposit. Some secured credit cards place your deposit into an interest-bearing savings account. Depending on the interest rate, you might be able to earn a few bucks.
See also  Auto Insurance For Teen Drivers

Drawbacks to Using Secured Credit

True, there are several benefits to using a secured credit card, but there are a few disadvantages, too.

  1. You have to pay the security deposit. It might be difficult to come up with $500 to $1,000 for the secured credit card. If you do have that mnoney, it might be better spent paying off some outstanding debt.
  2. There are fees in addition to the deposit. You might have to pay an application fee, processing fee, and annual fee to have your secured credit card. This increases the cost having the card.
  3. Higher interest rates. Secured credit cards don’t usually offer competitive interest rates because of the risk of default. To avoid high finance charges, pay your balance in full each month.

Is It Worth It?

Despite the drawbacks, a secured credit card can go a long way in helping you build a good credit score. When you can’t get a traditional credit card, a secured credit card is the best choice for improving your credit.

See also  What is an Instant Approval Credit Card?