What Are Secured Credit Cards and Why Are They Important for Customers?
Secured credit cards are types of credit cards that are designed to help their users build or improve their credit score. It can be tough to get a regular credit card if you have a history of late payments, bankruptcies, or no credit history whatsoever. Banks need a guarantee that their customers will pay back their debts in full and on time, so they’re very careful, and often rigorous when issuing credit cards. They rarely provide credit cards to high-risk customers, simply because they don’t want to risk losing money.
This is exactly where secured credit cards come in. Whether you have bad credit, or you’re looking to establish good credit from scratch, a secured credit card might be the best way to go. Secured cards accept a low credit score, which is yet another reason why many consumers are using them. Also, they have a low credit limit, which helps consumers avoid debt and further damage their credit scores.
However, to get a secured card, you need to make a security deposit. Your chosen bank will use the deposit as collateral so that it has a guarantee to fall back on if you fail to provide your payments. The deposit is refundable, but you must give it upfront to open an account.
Who Gets Secured Credit Cards and Why?
Secured credit cards are for individuals with a bad credit score, including those who have declared bankruptcy at some point. This is because these cards can help them improve their credit score, and quickly qualify for an unsecured credit card.
People with a poor credit score may be able to get some starter credit cards, but they usually carry high fees and high-interest rates. In cases of extremely bad credit, they simply aren’t eligible for unsecured credit cards. People with no credit history at all can also get secured credit cards because these cards are great for building credit from scratch.
Students can also easily get secured credit cards since they usually don’t have a credit history. But even when they do, having another account improves their creditworthiness.
How Can Using a Secured Credit Card Improve My Credit Score?
With a secured credit card, you get a second chance to show responsibility and prove that you can have a good payment habit. However, you must provide all your monthly payments on time, and in full.
Your credit card issuer will regularly report your payment history to the major credit bureaus, which will directly influence your credit score. Not every provider sends reports to the bureaus regularly or only reports to one or two of them. Finding a provider who will report to all three of them every month is essential.
Credit bureaus also want to see that you have more than one account because it shows that you are creditworthy.
Actively using your secured credit card every month, even for the smallest of purchases, can greatly improve your credit score. Small purchases, which you pay off on time and in full, actually show that you’re a responsible borrower, and they can also lower your credit utilization ratio, which is a huge factor for building a good credit score.
If you always carry a balance of less than 30% of your credit limit, your credit utilization ratio will drop. If you go above the limit, your credit score will drop.
5 Major Differences Between Secured and Regular Cards
Secured and regular credit cards are similar in functionality but have some notable differences.
1. Secured Credit Cards Require a Security Deposit
The biggest difference between these two types of credit cards is that you must provide a security deposit (which is refundable) upfront so that you can open an account for a secured credit card. Regular cards require no such deposits, as banks issue them upon checking your credit score, employment, and income.
2. Regular Cards Require a Good Credit Score
You need to have a Good or excellent credit score to obtain a regular credit card. There are banks that can provide you with a regular credit card if your credit score is not very good, but they come with very high fees and interest rates.
On the other hand, you can easily get a secured credit card if you have a poor credit score. Your provider may not look at your credit score (although some do), but rather only check your income, and your previous payment habits. They’re not likely to approve your application if you have a very bad history of missing payments, or if you’ve recently declared bankruptcy (or have a history of bankruptcies).
3. You Can Improve Your Credit Score with a Secured Card
As opposed to regular cards, you can repair your bad credit score with a secured card. After all, the primary purpose of these cards is to help people improve their credit scores.
You can improve your score by always providing full, on-time payments, and by keeping a low credit utilization ratio.
4. You Can Build a Credit Score from Scratch with Secured Credit Cards
Another purpose of secured cards is to help you establish a credit score when you’re a first-time credit card user. So, you can get a secured credit card even if you have no credit history at all. It can be a great stepping stone toward unsecured credit cards.
Given that you must provide a security deposit in advance, your card issuer will have collateral to fall back on if you don’t pay off your debt in full. You can get a regular card without a credit history, but you need to provide your chosen bank with your employment and income information. The bank will then determine whether you’re a low-risk or high-risk borrower so that it can decide whether or not to approve your request.
5. Low Vs. High Credit Limit
Secured cards have a low credit limit, which is actually set by your deposit. Every provider allows different minimum and maximum deposits that set your credit limit. However, you can increase your credit limit by putting down additional deposits. Your provider may also increase it if you’re always punctual and clear all your monthly payments.
Regular cards have a robust credit limit, but you can’t set it yourself. Your bank uses your debt-to-income ratio to determine your credit limit, that is, estimate how much of your monthly income you can use to provide monthly debt payments. Also, your bank is the one that can increase your credit limit, if they determine over time that you can handle it effectively.