If you’ve got poor credit scores or no credit history, you’ve probably heard the term secured credit cards in the past. However, when you do a search for what secured credit cards are exactly, all you seem to get is a list of the options available. But, that’s not what you want, you want to know what they are! So, today, I decided to write a post around these mysterious pieces of plastic. As you read, you’re going to learn what secured credit cards are, who they are designed for, who shouldn’t use them, and what other options you have. So, without any further jib jab, let’s get right to it!
What Is A Secured Credit Card Exactly?
Secured credit cards are accounts that require a security deposit before use. In most cases, once you apply for a secured card, you will be automatically approved, as just about anyone qualifies for them. Once you make your security deposit, you are free to use your card. In many cases, your credit limit for the new card will be exactly what you put down in your security deposit. However, in some cases, lenders may match your security deposit or do something else to allow you a higher spending limit.
In most cases once you start using your card, if used correctly over a predetermined period of time, it will soon become an unsecured credit card. This means that after the predetermined period of time, your security deposit will be refunded to you. Because the security deposit has been refunded, there is nothing holding the loan up other than the faith that you are going to pay the debt back. Hence the name change to unsecured.
Who Would Want One If You Have To Pay To Use It?
The sole purpose of secured credit cards is to help improve credit scores and prove that the borrower is worthy of future loans. So, anyone with poor credit scores or limited credit history could benefit from using one. The simple fact is, if you’ve got poor credit scores or limited credit history, chances are, it’s going to be pretty hard for you to find a decent credit card that you can be approved for.
How Do Secured Cards Help Credit Scores?
When you look at exactly what credit scores are, it’s easy to see how secured credit cards help to improve them. Your credit score is a number that helps to gauge your history of loan activity. So, if you’ve got a bad credit score, chances are, there are some loans that you’ve had in the past that you didn’t pay or paid late. However, history changes with every passing day. As the days, weeks, months, and years pass, your bad debts become older and older. By adding new, good debts to the mix, you can see a great improvement to your credit score. However, there are two very important details that you should know before you go apply for a new card…
- Secured Credit Cards Aren’t Where You Should Start – Have you ever ridden a bike through sand? Do you remember how hard it was? That’s because there was no solid foundation for you to ride your bike on. As the peddles moved, the tires dug deeper and deeper into the sand making you move at a very slow pace. This sandbox affect can happen with your credit scores. If you don’t start by cleaning up past debts, the help secured credit cards might provide will be pretty slow going. That being said, read this article for the first steps to improving bad credit scores before making a decision to apply.
- The Card Won’t Help If It’s Not Used Properly – If you’re going to use a secured card to improve your credit, it’s important to remember the underlying reason you’re using the card. The entire purpose of doing this is to build positive credit history. Therefore, if you don’t use it properly, you’re not doing anything good for yourself or your credit score. That being said, here are a few tips to help you make sure that your card is used properly…
- Never Get Close To Your Credit Limit – Statistics show that as consumers get closer and closer to their credit limit on their credit cards, they become less and less likely to pay back the balance in full. As they get closer to the limit, financial hardships start to become apparent. Your intent in using a credit card is to show lenders that you are financially stable and that you can handle more loans. If you spend too much on your card, you’re showing them the exact opposite. That being said, it’s best to keep your balance below 50% of your credit limit.
- Pay Your Balance Off Monthly – As you rack up balances, you want to show that you’re more than capable of paying them off at the terms that you agreed to. One of the best ways to do this is to pay your balance off completely on a monthly basis. However, if you can’t afford to pay the balance off entirely, make sure that you pay more than the minimum payment. The more aggressive you get with this, the better it will look on your credit report.
- Don’t Wait Until The Payment Is Due – Throughout the past several years, I’ve helped tons of people get out of debt, and improve the poor credit scores that were the result of overwhelming debt. In that process, I can’t tell you how many times I’ve heard, “I waited until the bill was due to pay it and did pay it when it was due, but it took a week to process and it showed up as late!” Don’t let this happen to you. Avoid the issue entirely by sending your payments in at least 2 weeks in advance.
Who Shouldn’t Use Them?
As with any other financial options, secured credit cards aren’t for everyone. The truth is, if they are put in the wrong hands, they can really do more damage than good. That being said, the only people that should use them are people who are financially disciplined and know that they will make their payments early, every time, and won’t overspend. If you’re the type of person that spends everything available to them, chances are, this is not going to be a good option for you. As with any form of revolving credit account, overspending on secured cards can really have a detrimental affect on your credit score and overall financial stability!
Other Options You Have
There is some good news for those who know secured credit cards will get them in trouble or for those who don’t want to put a security deposit down.. The truth is, they aren’t your only option for showing good, new credit accounts on your credit report. That being said, here are a few other options that could help.
- Poor Credit Credit Cards – If you do a quick search, you’ll find that there are tons of lenders out there like Horizon Gold that will be willing to approve you for a credit card without a security deposit. However, it’s important to remember that they need to make sure to alleviate risk some how when loaning to consumers with less than fair credit. That being said, these types of cards tend to come with higher than desirable fees.
- Cell Phone Contracts – Believe it or not, most cell phone companies that require their customers to sign a long term contract report account activity to credit reporting agencies. Let’s say you sign a 2 year contract at 100 per month. In this case, you essentially just took out a $2,400 loan. If that loan isn’t paid back, of course there are penalties. Therefore, cell phone contracts can be a good way to show good credit accounts on your report. However, it’s important to remember that these will not have as strong of an affect on your scores as credit cards and other revolving debts will.
- Other Loans – Any loan that you take care of the right way could have a positive impact on your credit score. This includes everything from personal loans to auto loans and everything in between. That being said, another option you have is to look for different types of loans that you qualify that are designed for things you need. If you need a car, and can get approved for an auto loan, that loan can really help improve your credit scores. However, it’s important to keep in mind that with less than desirable credit scores come less than desirable interest rates.
At this point, I hope that you’ve got a good feel for not only what secured credit cards are, but how they help, who shouldn’t get one, how you should use them, and what other options you have. As mentioned above, secured credit cards aren’t for everyone. However, if you do decide to use them and use them properly, they can really do great things for your credit score!
Do you have good credit scores? What did you do to earn your score?