Credit score–this is the real currency of today’s credit conscious times. Most times, it even beats actual, tangible cash. After all, it determines if loans will be approved or if mortgages can push through. Sometimes, it even makes or breaks a job opportunity–it’s that influential.
But we’re pretty sure you already have an idea about what a credit score is, and how important it is these days. Your concern then, as a financially responsible individual, might be something along the lines of building or rebuilding your credit.
When it comes to this endeavor, we have two words for you: secured card.
What is a secured card?
First of all, let’s agree that one of the quickest ways to quickly build a credit score, or even backtrack from bad credit history, is through a credit card.
But here’s the issue: obtaining a credit card is no easy feat. Banks often scrutinize your credit history before they approve your request to get a credit card. Sounds pretty stressful, right? Well, the good news is that there is a workaround for this. Secured credit cards.
Think of it this way: these are the student drivers’ permits in the banking world. They issue this to you so you can prove to lenders and people in the seat of the industry’s power that you are responsible. Not to mention, it will prove to them that you have the capacity to pay.
So what’s the catch?
One of the major requirements to open a secured credit card is for you to make a deposit. Just think of it as a security deposit. This is the bank’s way of securing their assets in the event that you fail to pay your “test drive” credit card a.k.a. your secured card.
How does a secured credit card work?
It mirrors everything about an unsecured credit card–how it works, how you can use it, and what you use it for.
From the interests that you can incur by not paying properly, to swiping dos and don’ts, all the way to using it to building your credit history–secured credit cards can do pretty much anything that a credit card can. Allow us to outline the distinction and its similarities in the next section.
Secured Card versus Unsecured Card
By now you already know that a secured card has a deposit requirement attached to it.
Allow us to illustrate the difference some more. These are the main distinctions and similarities between these two types of cards.
|Secured Cards||Unsecured Cards|
|Eligibility||Given to those with good credit standing.||Given to those who are still building or rebuilding their credit scores.|
|Requirements||It does not require a deposit. There is no collateral linked to the account.||Requires a deposit to the issuing bank for security purposes.|
|Secured Cards||Unsecured Cards|
|Annual Fees||They both charge annual fees (unless you’ve managed to negotiate otherwise).|
|Credit Scoring or Log||They both log your credit score/ credit history to the major credit bureaus. This includes Experian, TransUnion®, and Equifax®.|
|Interest rates||They both can incur interest if you don’t pay your bills on time.|
Do you now see where we’re getting at here?
Secured cards are your workaround. If your bank refuses to issue a credit card to you, this is your best option.
How does it differ from a prepaid card?
By now you’re probably thinking, “If I need to make a deposit first before I can swipe my card for purchasing purposes, isn’t this a lot like a prepaid or debit card?”
Well, allow us to circle back to the first and most important consideration here: your credit score.
The difference, you see, between a debit or prepaid card and a secured credit card is that a debit or prepaid card does not store your credit history. This is because your prepaid card activities are not reported to the credit bureaus.
There’s a simple explanation to this, really. See, a prepaid or debit card only limits itself to the amount of money that you have deposited into your account. It means that any outflow from this is directly deducted from your checking or savings account. Because it is your money that you’re using and there are no credits given to you by an issuer, there is no obligation to report your activities to the credit bureaus.
Is a secured card for you?
At this point, we’ve already covered what a secured credit card is, and how it differs from your other options. The next question to answer is whether or not this is something that you would like to apply for.
Here is a series of questions that you should ask yourself to see if this truly is something that you need.
- Do you want a good credit score?
- Are you someone who’s fresh out of school and want to build your credit score?
- Are you someone who’s had a bad relationship with money in the past but want to turn this around
- Are you willing to make an initial security deposit to open a credit card account?
If you answered YES to at least 3 out of these 4 questions, then a secured card is definitely a good choice for you.
How can you use a secured credit card to raise your credit score?
The way we see it, the only drawback to opening a secured credit card is the initial deposit that banks require from their account holders. Other than this, it really is the perfect workaround for building or rebuilding credit scores.
More than anything, a secured credit card is a chance for you to prove and/or redeem yourself in the eyes of lenders. To make sure that you keep yourself in their good graces, you should make sure to use this credit card type as responsibly as you can.
Here are some tips on how you can maximize your use of a secured card:
- Don’t overuse this card.
We get it–you’re excited about owning this shiny new card. With everything you want just a simple swipe movement away, you might be tempted to use your secured credit card every chance you get. However, the best practice is that you start slow. You’re still being closely monitored, so make sure to limit your usage of this card to up to three minor purchases monthly.
- Mind your interest rates.
Interest rates are the bane of every irresponsible card owners’ existence. These are the rates that incur every time a payment is missed. The best practice, as a secured card owner, is to avoid these interest rates at all costs. This can be done by paying your bills ahead and in full every time.
- Don’t get too comfortable with a secured card.
Your goal is to establish your credibility until such time that you can apply for an unsecured credit card from your services provider. Make it a point to constantly watch over your credit score so you’ll know when you can finally graduate from a secured to an unsecured account.