Why learn about secured credit cards?
Having a credit card is so amazingly useful, yet there are many people out there that may have trouble getting one.
Despite this, everyone should at least have one. Credit cards allow people to delay payment with no interest for up to 30 days. It’s the perfect financial tool for everyday purchases. Having a credit card (and using it intelligently) means you’ll never have to worry about not having money for groceries.
People with bad credit or no credit might not be able to open a credit card. For those people, we at The Credit Pros recommend getting a secured credit card.
What Are Secured Credit Cards?
A secured credit card is, in usage, just like any other. You can charge purchases on it up to the available limit. At the end of the pay period (usually a month), you then have to pay a certain amount of the balance.
The difference between a secured credit card and an unsecured one is in the name. Secured, in this case, means that it’s guaranteed by collateral. You have to put cash down in order to open a secured credit card.
How To Open A Secured Credit Card?
To open a secured credit card, you will need a bank account and some cash for collateral (as little as $250). Once you have a bank account, you can request one.
The bank will then ask for cash as collateral against your card. Collateral is not a payment, but is instead money held as a guarantee that you will pay your debts. If you are unable to pay your bill, the idea is that they can close the account and keep your money.
Your available balance is equal to the amount you put down. If you put $500 down, you have a credit card with a $500 balance. If you put $5,000 down, you have a $5,000 balance.
The collateral you put on the card is held for the life of the card. That is, if you cancel your card, you get your money back. However, if you miss too many payments, the bank has the right to close your account & keep the money!
Who Should Open A Secured Credit Card?
Secured cards are a way for people to build, or rebuild, a credit history. People who have zero credit history or a recent bankruptcy will not be able to get a regular card. Since credit cards are so useful, people who can’t get a regular one will need to open a secured one.
Because secured cards are guaranteed by collateral, virtually anyone will be able to open one.
Who Offers Secured Credit Cards?
Nearly every bank offers some form of secured credit card. Each bank has different cash requirements: some will allow deposits as little as $250-$1,000 and as much as $10,000.
Choose a card that most vendors accept such as Visa or Mastercard.
Are Secured Credit Cards the Same As Prepaid Cards?
No. Secured credit cards and prepaid cards are completely different, even though they may seem similar.
A prepaid card is more similar to a debit card, except instead of charging money to a bank account, it charges money to a cash balance. You purchase a prepaid card and only have access to the money that you put on it. You never have to pay a bill on a prepaid card. Once the prepaid card is empty, that’s it: you cannot use the card anymore unless you reload it.
A secured credit card is, well, a credit card! You charge payments on it. You get a bill at the end of the period. You’re responsible for paying the bill then.
Prepaid cards also have zero impact on your score whatsoever. Secured card payments are recorded on your history. Thus, they have an effect on your score.
How Does A Secured Card Help My Credit?
All credit cards help you if you use them responsibly. The secured type is no exception.
Having access to credit automatically helps your score over time. A secured credit card is an easy way to get access to credit.
Use a secured credit card for low-cost everyday purchases, and pay off the balance in full at the end of the month. This builds a payment history, and if those payments are on time, you will see your credit score go up.
Ultimately, you’ll want to either increase the balance on your secured credit card, or open a traditional card. This gives you access to more credit, which helps your score even more.
Need help understanding what a credit score is? The Most Important Thing You Need To Know About Credit Scores – Part One!