How does a secure credit card work?

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Building credit from scratch is often referred to as a chicken or egg problem. If you don’t have a credit history, it …

Building credit from scratch is often referred to as a chicken or egg problem. If you don’t have a credit history, it can be difficult to get approved for a credit card. But if you don’t have a credit card, it’s hard to establish a credit history.

Here’s where secured credit cards can save the day. It’s possible to be denied a secured credit card, but if you’re approved for one, it’s a good way to start your journey to great credit.

We’ll start with the basics and work our way through the pros – and cons – of secure credit cards.

Up to the front:

– Definition of a secured credit card.

– How secure credit cards work.

– Do secure cards create credit?

– Advantages and disadvantages of secured credit cards.

[Read: Best Starter Credit Cards.]

Definition of a secure credit card

There are unsecured and secure credit cards. An unsecured credit card does not require a deposit to be approved for the card. Major unsecured credit cards from major issuers are typically used by those with at least fair credit. Some unsecured credit cards are available for people with zero or bad credit, but they tend to have high interest rates and fees.

Due to the cost of unsecured cards that target people with poor or bad credit, many are turning to secured credit cards. Secured credit cards require a deposit, typically ranging from $ 200 to several thousand dollars, depending on the issuer’s deposit requirements.

The deposit remains in an account, and the purpose of the deposit is to decrease the risk to the lender. If you don’t pay for the purchases you made with your secured credit card, the financial institution will use your deposit to pay it back.

How secure credit cards work

When you get approved for a secured credit card, you receive a credit card that looks like an unsecured credit card. There is no visible clue that the card is secure.

The amount of your security deposit is usually equal to the credit limit of your new secured card. You will use your secured credit card just as you would an unsecured card. You can use it for purchases anywhere that accepts your secure credit card.

To be clear, your security deposit remains in an account with the issuer. You will make payments on your balance from one of your own bank accounts. So, in effect, you are buying things on credit.

[Read: Best Credit Cards for Bad Credit.]

Do secure cards create credit?

Most secure credit card issuers report your payment history to the three major credit bureaus: Equifax, TransUnion, and Experian. If you can’t find a confirmation on the card home page that the payment history is being reported, call the issuer to make sure that’s the policy.

When the bill for your secure card arrives, you must pay the bill on the due date. If you pay off your balance in full, you will avoid paying compound interest. If you regularly make payments on time and keep low balances on your card during the month, your credit score will start to rise.

Advantages and disadvantages of secured credit cards

There are many advantages to secured credit cards, but there are also disadvantages to this type of credit card.

Benefits:

– Secured credit cards help you develop your credit and develop a good credit rating.

– Secure cards help you learn how credit works. And since the credit limits are low, it helps minimize your risk of going into debt.

– Some credit card issuers will offer you an unsecured credit card. Not all secure card issuers have unsecured versions, but many do.

– When you have built a good credit history and are ready to switch to an unsecured card, you can get your deposit refunded.

– Many secure credit cards offer rewards and benefits.

[Read: Best Credit Cards for Fair Credit.]

The inconvenients:

– You must make a security deposit, and this immobilizes your money for the life of the secure card.

– Some secure cards have a lot of fees, so you should read the fine print carefully.

– You will likely have a low credit limit, but this is often a good thing while you are comfortable with credit.

– Some secure credit card issuers do not offer unsecured versions, which means you have to apply for an unsecured card from another issuer.

I know it is difficult to build up credit or come back from a bad credit rating. A secured credit card can be a great option, but make sure you read all of the disclosure statements and understand if there are any charges involved. After about a year of responsible use, you’ll likely have at least a fair FICO score (580-669), which is good enough to make the jump to an unsecured credit card.

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How does a secure credit card work? originally appeared on usnews.com

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