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Secured Credit Cards
Secured credit cards are designed to help people who are having financial trouble. They are a great way to help build or repair credit. This article will review how secured credit cards work and the pros and cons of using secured credit cards.
Many people are finding that, once their credit has been marked as less than desirable, it is difficult to get access to financing for a number of items. Unfortunately, with the credit market troubles afflicting the economy, even credit cards, which have long been used to help build and repair credit, are getting harder to come buy. This is why many people are taking a look at secured credit cards.
What are secured credit cards?
It is first to understand that there are two main types of debt: unsecured and secured. Unsecured debt is debt that does not have any collateral to secure it in case the borrower defaults. Secured debt, on the other hand, allows the creditor recourse. If the borrower defaults, the creditor can seize the assets used to secure that debt.
Secured credit cards are, then, cards that have some sort of collateral linked to them. This seems a bit of a contradiction because, generally, credit cards are unsecured debt. For the most part, secured credit cards are linked to some sort of an interest bearing account, usually a savings or a money market account. You put a few hundred dollars (or even a few thousand dollars) into the account, and just let it sit. You are not supposed to remove money from this account. You are granted a credit line that amounts to between 50% and 100% of the account (depending on your credit score and other factors).
It is important to note that when you use your card, the money is not deducted from your account. And you still have to make payments on your credit card and you are charged interest. The money in the account is meant to simply sit there. The card company may check to make sure that it is simply sitting there, and that you are not taking money from that account. If you default on your credit card payments, the card company then has the right to seize the assets in the account to cover what you owe.
Advantages of secured credit cards
The main advantage of secured credit cards is that you are able to get them when you might not be able to get some other type of credit card. If you do not qualify for another credit card, it is possible to get a secured card, since with the collateral you are not as big a risk.
Another advantage is that secured credit cards can help you build or repair your credit history. If you do not have credit, it can be difficult to get a loan for a number of things – house or car – or even to get a good deal on your insurance premium. This is true if you have bad credit as well. Secured credit cards allow you to build a credit history. If you make on time payments and if you show that you are responsible, you can improve your credit score.
Disadvantages to secured credit cards
One of the biggest disadvantages to secured credit cards is that you are limited in your credit line to what you can put into the interest bearing account. Another issue is that secured credit cards can have higher interest rates than their unsecured counterparts. High fees may also be charged if you exceed your limit or run into other problems.
For the most part, secured credit cards are best used by those with a need to improve their credit. Otherwise, there are other cards that are likely to serve you better.
Related Article: Unsecured Credit Cards >>
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