Secured Credit Cards
Secured credit cards have one main difference being that with secured credit cards, you need to pay a deposit in advance to guarantee your credit line. This upfront deposit ensures that the bank has collateral for any late payments you may make. Most cards are unsecured, which means that there is no deposit required to use your card.
During your application for a secured card, the card issuer will analyze your financial history and credit score to evaluate the amount you will have to deposit upfront. The deposit amount then essentially becomes your credit limit, and you can only make purchases up to this amount. If you decide to cancel your card, the card issuer will return your deposit.
Unlike traditional cards however, secured cards tend to have high APR, often greater than 20%. It is also important to distinguish the difference between secured cards and prepaid cards. While both require account holders to make deposits in advance of any transactions, the security deposit you put up in a secured card is only consumed if you miss a payment. With prepaid cards, the transaction amount of each purchase is deducted from the account balance. Furthermore, prepaid and debit cards typically do not report to credit bureaus because there is no line of credit being extended, whereas secured cards do and so can help build credit.
Building Or Establishing Credit
Secured cards are mostly used to strengthen or rebuild credit history. Secured cards also tend to have lower credit limits, which should make it easier for you to make your payments. Traditionally, they are built for those with poor or no credit history, they are pretty straightforward to get approved for, and hence charge a deposit to cover any risk. Thankfully there are now many options - some even with rewards - for individuals who are new to credit. We recommend applying for one of these credit cards rather than a secured card if you have Limited / No credit since it is likely you will be approved for a larger credit limit and can even earn rewards.
Secured cards are much easier to qualify for as compared to other traditional credit cards. If you are eligible, you may even receive a secured card that has a rewards program. Once you have paid your balances consistently for a period of time, your bank will likely pre-approve you to upgrade to one of their unsecured rewards cards.
Since secured cards are taken to mainly rebuild credit, there are a few spending tips that a secured cardholder should follow. Firstly, pay your card balances off in full. This will ensure that you are on the right path towards building better credit and your deposit won’t be consumed by your outstanding balance.
Paying your balance on time not only ensures that your credit score is not negatively impacted due to late payments but will also prevent you from paying interest on your payments. Secured cards also tend to have higher interest rates.
As you follow these tips, you should also keep a close eye on your credit score. You will eventually see it improve and after a few months, you can even contact your card issuer to inquire about a potential upgrade to an unsecured card. Most people using a secured card effectively can expect to improve their credit score in around a year.