The Pros and Cons of Secured Credit Cards
Whether you have bad credit or have never established a credit history, obtaining a traditional credit card can be difficult. Unfortunately, you truly need a credit card to begin building a good credit history.
For consumers who cannot get approved for a traditional credit card, a secured credit card may be the best option. With a secured card, you make an initial deposit to obtain a line of credit. Your deposit serves as collateral for the purchases you make. This deposit is usually refundable, provided you keep your account in good standing.
If you’re considering applying for a secured credit card, consider the pros and cons of these types of cards before submitting your application.
Pro: Almost anyone is approved
Because you must pay an initial deposit to obtain a line of credit with a secured card, card issuers are much more likely to accept your application – especially if you have poor or no credit history. The card issuer assumes very little risk with this type of arrangement, and is more likely to accept your application than a traditional card issuer would.
Con: You have to pay a security deposit
Some secured credit cards allow you to deposit a minimum of $200, but others require an initial deposit of $500 or more. It can be difficult to come up with this kind of money initially. Even if you can obtain enough funds to cover your security deposit, that money might be better spent paying off existing debt.
Pro: You can earn interest
Many secured credit cards allow you to earn interest on your deposits, making it an attractive option to earn a little extra money while rebuilding your credit history. While interest rates vary between companies, it’s an easy way to earn a few extra bucks.
Con: There are additional fees beyond the deposit
In addition to your initial security deposit, most secured credit cards charge additional fees. While there are a few secured cards that do not charge an annual fee, the majority do – and these fees can cost anywhere from $25 to $45 a year. When you tack on these additional fees, the cost of having a secured credit card may be prohibitive.
Pro: Your security deposit protects you
If you miss a payment, your security deposit will protect you and be used to pay any payments you’ve defaulted on. Because of this, you won’t have to worry about your account being sent to collections while debt collectors harass you to pay your bills. While you won’t get your deposit back if you default on a payment, this ensures you an extra level of protection you wouldn’t receive with a traditional credit card.
Con: High interest rates
Traditional credit cards are able to offer competitive interest rates to customers in good standing. With a secured credit card, interest rates are usually much higher because of the risk of defaulting on payments. To avoid high interest charges, it’s best to pay your card balance in full each month.
Even though there are drawbacks to using a secured credit card versus a traditional card, they are an attractive option for consumers with bad credit or no credit history at all.