Secured credit cards are a good option for individuals who are new to credit or have poor credit. If you have a low credit score, limited credit history, or have experienced financial difficulties in the past, you may find it difficult to get approved for a traditional unsecured credit card. A secured credit card requires a security deposit upfront, which serves as collateral for the credit line. This deposit can range from a few hundred dollars to several thousand dollars, depending on the card and your creditworthiness. Secured credit cards are also a good option for people who want to rebuild their credit. By using the card responsibly and making on-time payments, you can gradually improve your credit score over time.
How can this help build or repair credit?
Secured credit cards can be an effective tool for building or repairing your credit. Here are a few ways they can help:
- Establishing credit history: If you’re new to credit, a secured credit card can help you establish a credit history. By using the card responsibly and making on-time payments, you’ll begin to build a positive credit history.
- Rebuilding credit: If you’ve had credit problems in the past, a secured credit card can help you rebuild your credit. As long as you use the card responsibly and make on-time payments, your credit score will gradually improve.
- Increasing credit utilization: Your credit utilization ratio is the amount of credit you’re using compared to your available credit. Using a secured credit card can help increase your available credit, which can in turn lower your credit utilization ratio. This can have a positive impact on your credit score.
- Reporting to credit bureaus: Most secured credit cards report to the major credit bureaus, which means that your responsible credit card usage will be reflected in your credit report and can help improve your credit score.
It’s important to note that using a secured credit card alone won’t guarantee a significant improvement in your credit score. You also need to make sure you use the card responsibly by making on-time payments and keeping your credit utilization low. Over time, with responsible credit use, you can build a strong credit history and improve your credit score.
Drawbacks to choosing a secured credit card when building credit
While secured credit cards can be a useful tool for building or repairing your credit, there are some potential drawbacks to consider before choosing this type of card:
- High fees: Some secured credit cards charge high fees, including application fees, annual fees, and even monthly maintenance fees. These fees can add up quickly and may eat into the credit limit that you have available.
- Limited credit limits: With a secured credit card, your credit limit is typically equal to the amount of the security deposit you provide. This means that your credit limit may be relatively low, which could limit your ability to make larger purchases.
- Security deposit required: To open a secured credit card, you’ll need to provide a security deposit upfront. This can tie up your funds for a period of time. This deposit is typically refundable. However it may take several weeks or months to get it back after you close the account.
- No rewards: Many secured credit cards do not offer rewards or cash back programs. This means that you won’t earn any benefits for using the card.
- Limited options: The selection of secured credit cards may be limited compared to unsecured credit cards. This can make it more difficult to find a card that meets your specific needs.
It’s important to carefully weigh the pros and cons of a secured credit card before applying. If you do decide to get a secured credit card, make sure to choose a card with reasonable fees and interest rates, and use the card responsibly to build or repair your credit over time.
Initial credit impacts to keep in mind when applying for a credit card?
Yes, there are some initial credit impacts to keep in mind when applying for a credit card:
- Hard inquiry on your credit report: When you apply for a credit card, the credit card issuer will typically check your credit report to determine whether to approve your application. This is known as a hard inquiry, and it can temporarily lower your credit score by a few points.
- New credit account: When you’re approved for a credit card, you’ll have a new credit account on your credit report. This can impact your credit utilization ratio and average age of credit accounts, both of which are factors that can impact your credit score.
- Credit limit: The credit limit on your new credit card can impact your credit utilization ratio. If you have a high credit limit and don’t use much of it, your credit utilization will be lower, which can have a positive impact on your credit score.
- Interest rates and fees: When you’re approved for a credit card, you’ll be subject to the interest rates and fees associated with the card. If you carry a balance on your credit card and accrue interest, this can impact your credit score.
It’s important to keep these initial credit impacts in mind when applying for a credit card. While they may not have a significant impact on your credit score over the long term, they can impact your credit in the short term. By using credit responsibly and making on-time payments, you can build a strong credit history over time.