There’s a Catch-22 situation that you face when you are trying to rebuild your credit. You need a credit card or some other type of loan to your credit. Yet when you have credit problems, it’s very difficult to get a loan.
One way to obtain a new line of credit is to apply for a subprime credit card. Unfortunately, these cards will have exorbitant rates and fees. Alternatively, you can apply for a secured credit card which is a more affordable way to rebuild your credit. Although secured cards make up less than 1% of the US credit card market, they are specifically designed to help you build or rebuild your credit.
Secured Card Basics
The primary difference between secured and regular credit cards is that secured card users must submit a refundable security deposit before their account can be opened. You are given the choice of how large a deposit to submit, but the line of credit you receive will typically be equal to the size of the deposit you pay.
But once your secured card account is opened, it will look and operate just like a normal credit card. A secured card looks just like a normal credit card, and no one will know that it isn’t one when you use it to make purchases. Like any other credit card, you will receive a statement each month and must make a payment. If you choose to carry a balance, you will incur interest charges, just like any other credit card. The security deposit that you submitted will be forfeited if you default on your payments.
By making consistent on-time payments, you can add to your credit history and improve your credit scores. And when you qualify for a standard, unsecured card — and pay off your remaining balance — you can close your secure card account and receive your deposit back. In fact, some secured card issuers will automatically approve you for an unsecured credit card as soon as you qualify.
Advantages of a Secured Card
For those who suffer from credit problems, the most important advantage is how easy it is to be approved for the card. Because the bank or credit union will have a deposit equal to the card’s line of credit, it’s not taking a risk, and won’t require a strong credit history. This means that nearly anyone can be approved for a secured card, regardless of their credit history. However, the card issuer will first verify your identity, and check to see whether you have any pending bankruptcies.
Secured cards also allow you to quickly improve your credit history and raise your credit score. Unlike debit cards, a secured credit card account will appear on your credit history, contributing to your credit scores. After a year of making each monthly payment on-time, many secured card users can qualify for a normal credit card. They can then close their secured card account and have their security deposit refunded.
Furthermore, secured cards can offer many of the cardholder benefits that normal credit cards have. These are benefits exclusive to credit cards that you won’t find in debit and prepaid cards. For example, credit cards transactions are protected by the Fair Credit Billing Act, which ensures that you are never responsible for things that you didn’t receive. Secured cards can also come with valuable travel insurance benefits, such as rental car insurance. This allows you to save money by avoiding the expensive coverage sold by the rental car companies. Other valuable benefits include damage and theft protection policies, and extended warranty coverage. Also, many credit card issuers now offer all cardholders free credit monitoring. This benefit is especially valuable to secured card users who are trying to rebuild their credit.
What to Look for in a Secured Card
When you are comparing credit cards, the first thing that you will want to check out is a product’s rates and fees. This is especially true with secured credit cards, as they can have higher rates and fees than standard, unsecured cards. Thankfully, every credit card’s rates and fees are required to be printed in a standard format.
The most important fee to look for will be the card’s annual fee. Some secured cards have no annual fee, but others can have high fees that can be billed as monthly. You also want to look out for any application fees, maintenance fees, processing fees or additional cardholder fees.
You will also want to examine a card’s interest rates. In general, secured credit cards will have higher interest rates than the most competitive unsecured cards. But fortunately, these rates can be lower than many regular credit cards that are designed to help you rebuild your credit. You also need to see if the card has a grace period, which will allow you to avoid interest charges by paying your monthly statement balance in full.
Next, you should look for cardholder benefits. A secured card won’t have as many purchase protection and travel insurance benefits as a premium rewards card, but it should offer some. If you will be using your secured card to rent a car, then you will want to ensure that it comes with rental car insurance. And if you are planning on making major purchases with it, look for a card that offers a purchase protection against accidental damage or theft, as well as extended warranty coverage.
Finally, it can be helpful to apply for a secured card that’s offered by a bank or credit union that also issues standard, unsecured cards. This will make it easier to transition from your secured card to an unsecured card when the time comes.
Secured cards can offer you an affordable way to build or rebuild your credit at a time when it can be extremely difficult to receive a loan. At the same time, having a secured card allows you to enjoy the security and convenience of a credit card, as well as its cardholder benefits. By comparing a card’s terms and conditions, and learning about its benefits, you can choose the right one for your needs.