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Secured credit is a way for people with bad credit or no credit to begin building their credit to use later for large purchases. When compared to unsecured credit, secured credit is inferior because you must first pay a security deposit and usually only have that amount available to spend. However, some people may prefer to cap their spending limits to prevent them from spending too much. Additionally, almost anyone can obtain a secured line of credit since they are paying upfront for it.
What is Credit?
To understand secured credit, you should first understand what credit is. A numerical credit score measures your credit. With a higher credit score, you’re able to obtain a loan or a line of credit with better rates and terms attached. Having good credit allows people to make large purchases without having to pay for them upfront. This makes it easier to reach their goals, such as buying a house or sending their child to college. Unfortunately, everyone starts with no credit, and some people have bad credit for past financial troubles.
A person’s credit score reflects their creditworthiness, basically their ability to pay back the debt they’ve accumulated. If you’ve responsibly paid your bills on time and in full, then your credit score goes up. Banks and other lenders use the applicant’s credit score to decide if they are willing to lend funds to them for their endeavors. Other companies and people are also interested in a person’s credit scores for things like renting an apartment, insurance premiums, or getting a job.
The three credit reporting bureaus Equifax, Experian, and TransUnion, monitor and update each person’s credit scores. They use a person’s past financial behaviors, credit utilization, and other factors to develop their credit score. Each bureau collects, analyzes, and uses consumers’ data to show banks and other interested parties how responsibly you’ve handled your debt in the past.
Secured Credit
Secured credit is for those people that have bad or no credit to be able to begin building some. After a person improves their credit score, they are usually able to obtain better credit offers. If you are interested in getting a secured line of credit, you can apply for that type of credit card. If approved, the bank or lender would require you to pay a security deposit, and that amount is typically the amount of credit you have to use.
Cheaper than Unsecured Cards
Secured credit cards are usually cheaper than unsecured cards for bad credit. This is because unsecured credit cards carry less protection for the bank or lender that issues the card. The security deposit they collect acts as collateral for the bank or lender to ensure they do not lose their money. If you only use a portion of the available funds and don’t miss any payments, your credit score will improve in only a few months.
Builds Credit
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Responsibly using a secured credit card shows that you have learned from your past financial mistakes and are more responsible with your money. Other than paying the initial security deposit, secured credit cards work the same way that other credit cards do. They are accepted at almost any retailer nationwide and provide users with a fixed credit limit so they can keep better track of their spending. In addition, the bank or lender that issues the card will report information to the credit bureaus monthly.
Higher Interest Rates and Fees
The main downfall to secured credit cards is that they often have higher interest rates and additional fees for using the card. Also, after you have improved your credit, you may be stuck with a credit card you don’t need. Most banks that offer secured credit cards also provide an upgrade to an unsecured credit card, with better rates after the applicant has improved their financial behaviors. Another downfall is that you only have a small amount of credit you can use on it. Usually, this credit line amount equals the amount of funds you initially paid to obtain the card.
Most banks often have secure online applications and online banking so that you can apply for the card, pay your bill, and monitor your spending habits from your home or office. However, be aware of scams and read the fine print to make sure you agree with all of the terms of the credit line.
Go online to whichever bank you prefer and fill out their secured credit card application to apply for a secured credit card. However, ensure that you are not getting involved with a scam. If you pay your monthly bill on time and do not carry a balance over each month, you are on the right track to improving your credit and obtaining better credit offers. In time, you’ll also be able to achieve even greater financial goals.
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