With so many options to choose from, choosing the right credit card that works for you may seem like a difficult task. This can be even more complicated if you have a damaged credit score or if you have no credit at all. The fact is that you are often asked to have a credit card before you can start building a credit history.
Therefore, if you find it difficult to obtain the approval of a standard credit card, the use of a secured credit card may be the way to go for you. These credit cards may have different interest rates, conditions and charges, so before you sign your credit card, it is crucial to know if this type of card will adapt to your life options and your economic situation. Here is everything you need to know about using a secured credit card.
What is a secured credit card?
Guaranteed credit cards differ from traditional credit cards in that they require customers to pay a deposit to be approved for the card. Financial institutions maintain this deposit as a guarantee for payments and purchases made with the card. The deposit paid will be retained by the credit card provider in case the customer does not make their card payments on time. But as long as you manage your expenses methodically and manage your account well, many credit card issuers will return your deposit after a certain number of months, or when you decide to close your account.
Guaranteed credit cards usually have a credit limit that is equal to the security deposit paid as proof of their ability to make future payments. However, some financial institutions may offer a higher credit limit, depending on the card you select and your creditworthiness.
1. Easy approval – these cards are easier to obtain than standard credit cards. Card providers issue them quickly, as they receive a security deposit that protects them against any credit risk.
- Improve your credit score – the use of a guaranteed card helps you build your credit rating by reporting your credit performance to the credit agencies that incorporate these details into your credit report.
- Protection – in the event that you do not comply with your payment, your losses will be limited to the amount of the deposit you initially paid to the card. Although this will damage your credit score, you will not have problems with debt collectors or you will have to worry about serious legal implications.
1. Considerable deposit – if you are in a situation where you have financial problems, the security deposit required to obtain these cards may seem significant. If this is the case, it is better that you use your money to pay off existing debt and save each month until you charge enough to pay the security deposit.
- Additional charges – many financial institutions charge their own charges in addition to the deposit to be paid. These can come in the form of application costs, processing costs and even annual maintenance costs.
- Higher interest rates: secured credit cards usually have higher interest rates than conventional cards, due to the risk of default. To keep these charges to a minimum, it may be worth paying the balance in full each month.