What Are The Pros And Cons Of Secured Credit Cards?
About Secured Credit Cards A secured credit card is a credit card that works based on a cash deposit that is used as a guarantee for the credit limit. The deposit amount acts as the credit limit on the card. The secured cards are meant for those people who have never applied for credit or whose credit history is rather weak.
The card issuer keeps the security deposit in a bank account until the time the credit card is active. The cardholder still receives the statement showing the credit card balance and has to repay at least the minimum amount by the stated date. When the cardholder cancels this secured card, the issuer gives back the deposit provided that the cardholder was paying his bills on time and has no outstanding balance.
Benefits of Secured Credit Cards Help Create Credit History One benefit of secured credit cards is their ability to help create or restore credit history. Every month, credit bureaus learn from cardholder payments whether or not they have been timely. A credit score is determined in part by payment, but especially by credit history. Whether one will be authorized for a loan, credit card, or low interest rates going forward depends on their credit score.
Particularly Simple to Qualify Those without credit history and those who have had credit problems like bankruptcy, default, or excessive credit use have more likelihood of getting authorized for secured cards. Usually based on credit rating, a credit limit on an unsecured card is provided; hence, a good or an exceptional credit rating is seen as desirable. Businesses that provide secured cards are particularly focused on whether the candidate can afford to make the first deposit.
Reduce Risk for Authorizer By using an early deposit, one may reduce the likelihood of the card issuer suffering a loss resulting from the cardholder's non-payment of bills. Lower risk allows issuers to credit higher-risk candidates they would not be able to credit lower risk applicants. In the event of a cardholder who has failed on his payments, the deposit money also helps to lower the probable damages.
Can use a card to purchase bills. Purchases and payments made on a secured card follow the same process as those on a debit card or regular credit card. They also say that using a handy way of payment promotes excellent financial practices and helps control expenses. Unlike what most people think, careful credit card usage and timely bill payments help to improve credit.
Capacity to replace with an unsecured card In case these secured cardholders have been paying their bills on time, lenders of secured cards may encourage them to unsecured ones. They increase the credit limit and also return the security deposit. This graduation alternative changes the account type to a normal credit card without a security deposit.
Disadvantages of secured credit cards Upfront Security Deposit A credit card is something that applicants do not want to pay upfront to get. Proposing a deposit of between $200 and $500 may be quite a challenge for applicants who are financially strained and in the process of rebuilding their credit. However, some issuers rebate deposits after the first six months for members who manage their accounts well.
Lower Credit Limits The credit limits on a secured card range usually vary between $200 to $500. Though limits this low help to minimize such risks and satisfy the requirements of beginners, low limits complicate the control of monthly charges. It is even possible that well-qualified applicants get lower initial limits with secured cards.
More Fees A survey of secured credit cards reveals that compared to normal credit cards, issuers of secured cards charge expensive fees more frequently. Customers should be wary of high charges such as monthly maintenance fees, application fees, annual fees, late fees, and low credit limit fees. These additional costs lower the value of secured cards.
No Rewards or Cash Back Secured cards do not offer attractive bonus rewards in the form of cashback, points, or even airline miles as unsecured/standard credit cards normally do. It implies that consumers do not recover any of their spending through the usual incentives that many credit card holders benefit from. The reward of secured cards is to help cardholders establish credit or restore credit as a result of needing the initial cash deposit.
Impact on Credit Mix Consumers with the best credit rating are seen to have multiple opened credit cards across the different loan categories. For instance, having of installment loans, credit cards, mortgages, and vehicle loans for example results in better risk profiles. The use of a secured credit card means that there is reporting of one type of account which distorts the diversity of the accounts reported to the credit bureaus.
The effects of Secured Credit Cards on credit scores Credit Mix A credit mix consists of the types of accounts such as mortgages, automotive loans, student loans, and credit cards. The presence of various accounts in the credit report reveals that the customer has dealt with various types of accounts of credit. Secured cards are useful for those borrowers who have no open credit lines in the form of revolving credit.
Credit Utilization This measure simply represents the utilization rate of credit cards by comparing the balances of credit cards to the total credit limits extendible to the credit cards. A credit utilization rate below 10 percent indicates good management of resources while above 30 percent increases risk levels. The limits on secured cards are low, therefore customers have to maintain spending and balances extremely low to improve credit scores.
Payment History The majority of FICO credit scores are built from on-time payments. After 12 months of perfect payments, secured cards depict creditworthy use that the credit reference system rewards by assigning a higher score. Delays and omissions cause fast score drops as well as costly penalties for the card issuer.
Credit Age and Inquiries Total accounts and length of credit history account for 15 percent of credit scores. After one year of maintaining secured cards, credit history expands, but new inquiries show efforts to get credit. However, usually, the positive factors tend to outweigh the hard inquiries in the long run.
Secured Credit Cards and Ways to Establish Good Credit Make On-Time Payments Payment history is 35 percent of the FICO score. Pay on time by enabling autopay or using calendar notifications to ensure you don’t pay all or part of the balance at the wrong time and negatively impact credit scores. And ideally, keep your balance above the minimum but better yet, settle the entire amount every month.
Keep Card Active Paying off cards or closing accounts that are not in active use reduces the length of credit history and credit. Ensure that you occasionally make transactions using the secured card to keep the credit line active. Due to the open account, credit mix and history metrics improve.
Limit Credit Inquiries Applying for excess credit generates many tough inquiries which in turn reduce the scores for some time. Once you get a secured card, do not apply for any new credit for at least one year. Making one shopping comparison within the targeted time is considered one credit pull.
Watch Credit Limits Secured cards are designed to have low credit limits, so the cardholder must maintain the spending and balances very low. Credit utilization above thirty percent for all the cards shows higher risk and a drop in credit score. This means that one can split expenditure into several cards to manage the usage rate on an individual as well as a consolidated basis.
Gradual Progression of the Graduate or Upgrade Card Pay on time and in full to avoid exceeding the credit limits to get a graduate to unsecured cards with higher credit limits and improved credit terms, privileges of a cardholder, and increased spending power. Graduation symbolizes responsible consumption that enhances the utilization of credit.
Summation In light of the reward of easy approval odds for credit building, simple online applications, availability of revolving credit, and discipline the cons of fees and deposits cannot be considered to be an impediment. Timely bill payments depict a good part of a person. Only by dedicating time and effort, secured cards reveal improved chances of acquiring better premium credit cards, credit-based loans, mortgages, and improved interest rates. When choosing a secured card, compare several offers to limit the number of fees and maximize the length of grace periods. Be flexible with spending as credit is available to improve credit scores with time.
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