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Weighing the Pros and Cons of Secured Credit Cards

[Friday, October 11th, 2013]

If your credit score has seen better days and you are having trouble getting approved for a credit card, you may have considered applying for a secured credit card.

Before figuring out whether a secured credit card is the best option for you, it`s important to understand exactly what a secured credit card is. Here, we will go over some of the reasons people get secured cards, how they work, and what the benefits and drawbacks of secured cards are.

  • Who applies for a secured credit card: People with poor credit—in the range of 600 or below—often apply for secured cards. They are not good options for folks with good credit, or even average credit. But things happen and sometimes credit scores take a beating. It could be due to illness, unemployment, a business deal gone sour, or a divorce, but whatever the reason for the bad credit report, a secured credit card is a way for people to get back in the credit game and build their score back up while taking advantage of the conveniences a credit card offers.
  • How a secured credit card works: The applicant puts down a deposit to act as collateral for the line of credit. This protects the lender in case of default. In most cases, the amount of the deposit will be the amount of credit extended—at least initially. That means if you wantto have a $500 line of credit, you will have to pony up $500 to start with. It may seem strange to pay $500 for a line of credit worth that same $500, but after a period of time with regular payments and good borrowing behavior, your credit limit will likely be raised.
  • Benefits of secured credit cards: The big benefit of a secured card is the ability to mend your credit. But be sure to pick one that reports to major credit bureaus, or this may not happen. When you can’t get a regular, unsecured credit card, a secured card offers a way to rebuild credit. The other benefit is simply the convenience of being able to use a credit card when you need one. Many places require a credit card, such as car rental agencies or online merchants. Having one makes life easier.
  • Drawbacks of secured credit cards: Besides requiring cardholders to put down a hefty deposit, secured cards often have higher fees than other types of credit cards. There can be fees for opening the account, monthly maintenance fees, and very high interest rates. The high interest rates can be avoided by paying off your balance in full each month, but the other fees may be unavoidable. If you are going to apply for a secured card, pick one with minimal fees and be sure to read the terms and conditions closely.

Before you get a secured credit card, make sure you really need one. There are unsecured cards available these days even for people with damaged credit. Try a card meant for students, immigrants, or others with no credit history. You may be surprised to find that you are eligible for one of these cards. If not, then a secured card may be the answer for you.

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