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Pros and cons of secured credit cards

Pros and cons of secured credit cards

September 29, 2016
secured credit cards
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Secured credit cards are very useful tools, especially if you’re looking to build good credit. They work like regular credit cards, and, just like regular credit cards, they come with pros and cons.

What are secured credit cards?

What sets secured credit cards apart from other credit cards is the fact that, in order to get one, you need to make a deposit. This deposit then works just like collateral for the purchases you make with the card. If you default on your payments, the card issuer keeps your it. Usually, the credit limit on a secured credit card will be equal to the deposit.

Pros

  1. People who are having trouble getting approved for a traditional credit cards, can use secured credit cards instead and build their score with it. If your issuer sees that you use your card responsibly and that you make all your payments on time, you’ll have a better chance of getting approved for a traditional credit card in the future.
  2. They report to credit bureaus. This means that your credit report will include all the payments you make.
  3. It can help you establish or re-establish your credit. Because your payments are included in your credit report, paying everything on time and acting responsible with your card will help improve your score. You can go back to using regular credit cards after building your credit score.
  4. If somehow you won’t be able to make your payments, your credit card company will just keep the deposit. You don’t have to worry about debt collectors knocking at your door.
  5. You can actually earn interest on your deposit. With some secured credit cards, your deposit is placed into an interest-bearing savings account. Depending on the interest rate, you might be able to earn a few bucks.

Cons

  1. The biggest drawback of secured credit cards is the deposit. If you’re having money troubles, you’ll find it really hard to put aside even a few hundred dollars. And maybe you need those dollars to pay off other debt.
  2. In addition to the deposit, secured credit cards also come with some fees, such as application fees, processing fees and annual fees. This increases the overall cost of having the card.
  3. The interest rates may be higher. Because of the risk of default, secured credit cards don’t usually offer competitive interest rates. That’s why it’s important to pay your balance in full each month.

Final word

They may have their own drawbacks, but secured credit cards are still a good idea. If you want to build credit, if you want to learn how to use a credit card responsibly, then secured credit cards are the perfect tools to help you do it.

 

Thomas Hookton

Thomas Hookton is a finance journalist, history buff and science fiction connoisseur. Hit him up via email.

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