In the U.S. having a good credit score is an essential aspect to consider when applying for a mortgage, for a loan, for a credit card or even when you are trying to rent an apartment, this credit score figure may vary from 300 to 850 and it is calculated according to your credit report data. It determines your credit reach and possibilities; therefore, it is very important to build a great score in order to get the more benefits possible from the system, such as easier credits, loan endorsements and advantageous interest rates.
If you are recovering from a bankruptcy or from any economical misfortune and you want to rebuild your credit reputation or if you are in your twenties and you want to start creating a good score, one of the best way to do it is by acquiring a secured credit card.
What is a Secured Credit Card?
A secured credit card works as a regular card: you have a credit limit, you have to pay the balance monthly and you can purchase in different stores, even shop online, the only difference is that, in order to obtain it, you are required to make a security deposit which will be, most of the time, equivalent to your credit limit. The card issuer keeps your deposit as a guarantee in case you don’t accomplish your payments.
“If you are recovering from a bankruptcy or from any economical misfortune and you want to rebuilt your credit reputation or if you are in your twenties and want to start creating a good score, one of the best way to do it is by acquiring a Secured Card”
If you use your secured credit card responsibly and make on-time balance payments, you could even achieve a small increase in your credit limit despite the amount of your deposit. Also, a few months later, you could become a prospect to an unsecured or regular credit card.
What Is the Difference Between a Secured Card and a Prepaid Card?
The prepaid card doesn’t work as a credit card; there’s no credit limit. To use this type of cards, you just have to deposit an amount of money in an account that is linked to that card and every time you make a purchase the money will be deducted from this balance. When that amount of money is over, you need to redeposit in order to purchase again. These type of cards won’t build you any credit history.
The secured credit card works as an actual credit card, even if you need to make a deposit in order to acquire it. The security deposit is requested because the person has no credit score, so he/she is considered a risky borrower. The information regarding the payments of the secured credit card balance goes to the credit bureau, in that way the person starts building his/her credit history. If the credit score goes high enough, the secured credit card could become a regular credit card, transferring your security deposit to a saving account.
Benefits of Secured Credit Cards
- No credit history needed: If you have applied for regular credit cards and your requests have been denied, secured credit cards are a great option for you. As mentioned before, in order to apply for this type of cards, you don’t need a credit history; actually, this will be a great tool to start building a good credit score.
- The credit limit is your decision: At the beginning, as you make the deposit, you will decide your credit limit. It means you can get a card with a credit amount you can actually afford. You could start with a 300 dollars’ credit limit and use it for small purchases, for example, in the supermarket or drugstore.
If it is hard for you to get the amount of money needed for the deposit, it is recommended to save 10, 20 or 50 dollars a month; keep in mind that some issuers will give you a secured credit card with only a 200 dollars’ deposit.
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- First step to obtain unsecured credit card: As most of the secured credit cards issuer share their information with the credit bureau, you will start creating a good credit score and, as a consequence, you will become an appealing candidate for regular credit cards or loans.
- Interests on the deposit: As your security deposit is located in a saving account, in some cases (depending on the card and the issuer) you will be able to gain some interests from this money. As a consequence, you will be killing two birds with one stone: you will build your credit score and also save some extra money.
What about the fees?
Most of the secured credit cards have the same fees of a regular credit card. If you manage your payments responsibly, you could avoid the finance charge and the late fee. However, there are some fees that are usually mandatory, such as the application fee or the annual fee. When choosing a secured credit card, it is very important to evaluate which is the issuer that offers the lowest fees and interest rates.
Read also: Credit And Credit Cards – Basic Concepts.
One example of a great secured credit card is the Capital One® Secured MasterCard®. You can use it in many different locations, fees and interest are lower than other secured cards in the market, you can start with a 200 dollars’ credit limit and no annual fees will be required. Another example is the First Progress Platinum Prestige MasterCard®. This a good option for people trying to rebuild their credit history. You will have to submit a secure deposit of a minimum of 200 dollars when applying; no processing or application fees will be required and there’s no minimum score credit needed.
Keep in mind that acquiring a secured credit card will be the first step to build or rebuild your credit score; therefore, evaluate attentively all the options available in the market and be sure to manage your finance accurately and responsibly in order to fulfill your duties.