As part of celebrating the credit education month, this week we are focusing on secured credit cards. Today’s post will help you understand what a secured credit card is, how it works, and what are some of the money habits that go with it.
What Is a Secured Credit Card?
Bank of America explains the concept of a secured credit card and how it works as follows:
A secured credit card uses the money you place in a security deposit account as collateral. Your credit line is based on your income, ability to pay and the amount of your cash collateral deposit. For example, if you put $1,000 into the deposit account, your available credit line will be $1,000 if you have sufficient income and can demonstrate your ability to pay. Note that a secured credit card is not the same thing as a prepaid card. Your initial deposit is simply collateral and doesn’t count toward payments. A security deposit gives lenders the confidence that you will pay them back, even if you have damaged credit or no credit history.
How do Secured Credit Cards Work?
A secured credit card works just like a traditional credit card. That means you can use it for everyday purchases as well as for transactions where cash or debit cards aren’t accepted (like reserving a hotel room or paying for a car rental).
As a result, a secured credit card can help you build or re-establish your credit. However, if you default on your payments, the card issuer may keep your deposit. This means that making your monthly payments on time is just as crucial with a secured credit card as with a traditional card.
Most secured cards are reviewed periodically. If the review is successful, you may qualify for an unsecured credit card and receive a refund of your deposit. Eventually, responsible credit behavior could help you qualify for lower interest rates on mortgages, cars, or other big-ticket items. When handled properly, using a secured credit card to help build or rebuild your credit can demonstrate to your credit card issuer and to the credit reporting agencies that you are a responsible consumer who uses credit wisely.
Money Habits with a Secured Credit Card
- Pay your balance off in full. It will help your credit score and save you money on interest charges that would carry over month to month. This also helps you form the habit of spending only what you can afford.
- Pay your bill on time each month. You avoid late fees and build a positive history of on-time payments in your credit report.
- The issuer of the card sends your good report to all three major credit bureaus. You’re creating healthy credit card habits that your credit report will reflect.
- Read the fine print. Researching the best secured card with the lowest annual fee and interest will prepare you for the offers of unsecured credit cards.
- Secured credit cards are not cash. Essentially, it’s a line of credit from a security deposit you are making. Not being able to take out cash from your credit card will get you into a better habit. You won’t be relying on that option for the future with unsecured credit cards as they usually charge a fee.
Learn more about different aspects of credit by visiting our website or speak with a certified counselor at American Consumer Credit Counseling at 800-769-3571.