“Can’t live with them, can’t live without them.” Some people think of cutting up their credit cards to avoid falling into a debt spiral. The responsible use of credit cards though is helpful in building or improving one’s credit rating. But not everyone can qualify for unsecured credit cards, the regular ones in the market. Get to know an option called secured cards.
What Are Secured Cards?
Secured cards have the usual features of a credit card, mainly:
- Interest rate. What the lender or credit card issuer charges you for borrowing money.
- Credit limit. The maximum amount of credit you can borrow under your card. This can increase over time.
- Minimum payment. The amount of money you are required to pay at the minimum by each monthly due date. Minimum payments only cover the interest so it has the effect of prolonging the debt as the principal remains unpaid.
- Repayment period. The period you are expected to pay back your debt. If you fail to repay such debt, you will incur charges.
Those with an average credit score, a bad credit, a checkered credit history, or new to credit can have trouble getting credit cards. These so-called subprime borrowers can turn to secured cards.
The Debit Side
Here lies the distinction between unsecured and secured credit cards. Secured cards need a cash deposit, a security in order to use the card or get qualified for it. This deposit or a percentage based on it will serve as your credit limit.
The deposit will secure the repayment of any debts on your credit card. For as long as you remain on top of your obligations, this deposit is generally untouched and released upon lender’s discretion or when you close your account.
Perks of Credit Card and Debit Card Combined?
When you think of the basic needs of paying bills and purchasing groceries and stuff to booking flights, making hotel reservations, and paying for any medical emergencies, secured cards will do the work for you.
Your credit card issuer is likely to report your behavior to the credit bureaus and land on your credit report. This makes rebuilding or building your credit possible. Moreso that your credit report makes no distinction if you hold an unsecured or secured card.
It’s not just the issuers that are served by having a security deposit. The security should make you more mindful of your spending, making sure you borrow within your limit.
More importantly, you are afforded consumer protections just like any other credit card holder under the CARD Act.
What to Look for in Secured Cards?
If you plan to apply for a secured card, always shop for competitive rates and reasonable fees. Compare annual fees, interest rates and penalties for late payments.
Be wary of fees that could eat at your credit limit even when you have not started using it. Add-ons, e.g. insurance that sound shady and unnecessary should raise red flags.
Ultimately, your aim should be: to find a secured card that will help you build your credit, not unduly burden you with costs to keep it.
Credit unions and banks may offer secured cards.