Secured Credit Cards Can Help Reestablish Credit
Secured credit cards can improve credit ratings
A secured credit card is a good way to reestablish credit. Even for those who do not have a bad credit history, a secured credit card can be a safe way to control spending and avoid bad debt. Knowing exactly what these cards are and how they work helps people make sound financial decisions about their credit.
What is a secured credit card?
Some credit card companies actually exist to help people repair bad credit and control spending. They do so by offering people an opportunity to make a cash deposit in exchange for a credit card that will be secured by that deposit. The credit limit offered generally ranges up to 120 percent of the original deposit. This deposit also earns interest as long as the account is in good standing. Timely payments are reported to the credit bureaus, which can help people seeking to reestablish a good credit rating. Also, the credit bureau’s are never told that the credit card is secured and, therefore, it is featured on one’s credit report as any other credit card would be.
What happens if I default on the payments?
The reason that secured credit cards are considered safe is that defaulted payments are covered by the initial deposit. Late payments are also reported to the credit bureaus, which further damages a poor credit rating. Even with a deposit, people using a secured credit card must be responsible about paying their credit card bill every month on time.
How can I increase the limit on a secured credit card?
As discussed above, a person’s spending limit is set on a secured credit card in relation to the initial deposit. There are two ways to increase one’s credit limit, however. The first way involves adding to the deposit amount. Or a person can patiently await a second option, which involves an increase after accomplishing a good payment history during a set period of time, which is generally one year.
Interest rates and fees
Consumers with bad credit will most likely encounter higher than average fees with a secured credit card. Most also require an upfront processing fee and the annual percentage rate for a cash advance or for balances can also be high. However, the price for reestablishing good credit is usually worth the additional costs for people who use secured credit cards.
Cost, convenience, credit
While a secured credit card is more costly than a regular credit card, its reward is something that cannot be obtained in too many other ways. Those who have bad credit generally appreciate that such offers exist and many have made good use of them as credit recovery tools. The fact that they are not represented to others as a secured credit card is also a convincing factor to people, as they are able to rent cars, reserve hotel rooms and use them just as any other credit card as long as the spending limits are adhered to.
Because they require a deposit and credit limits are restrained by that deposit, some people find them to be inconvenient. Another way to view them, however, is to consider that a credit line that is limited, or secured, by a deposit helps to decrease the risk of overspending. As much as reestablishing credit, this simple fact makes a secured credit card an attractive choice for those who have had poor spending habits and a history of collecting bad credit card debt.