Secured Credit Cards
There are very few of us who do not have at least one credit card to our name. What used to be meant for emergencies and large household purchases has now become the stuff of daily life. A trip to the grocery store, a fill up at the gas station, and a myriad of other day to day purchases have all become purchases for which the use of a credit card is completely appropriate. On one hand the use of a credit card in these instances can be far more convenient; it’s certainly much easier to carry around a credit card than it is to have cash on hand. On the other hand, however, it is much easier to lose track of how much you are spending when you are not dealing with actual money. When the bill comes it’s a surprise for many of us; although we were certainly engaged in the purchasing it all seems to run together after awhile. So it should come as no surprise to anyone that credit card debt is rampant in this nation, with more and more consumers seeking everything from credit counseling services to bankruptcy in order release themselves of debt.
The truth is, however, that rebuilding credit is a process. Just as it took time – and a string of poor judgments - to cause a decline in our credit standing, it will take time – and consistent “good behavior” to see that credit standing vastly improved. It’s just like losing weight; there is no magic pill that will have lasting effects; good old-fashioned diet and exercise will achieve good health. And the same can be said about finances; consistency works. To this end, one of the ways in which consumers can make strides in repairing their credit is through the use of secured credit cards.
What are secured credit cards?
When we apply and qualify for traditional credit cards lenders extends to us a line of credit with an interest rate and credit limit attached. We are not permitted to exceed that credit limit and, of course, we are expected to make on time payments every month. With secured credit cards, however, the borrower is required to make a collateral deposit that is held in a savings account by the lender. For instance, if the borrower desires to have a credit limit of $2,000, they must first deposit at least that amount into the lender-held savings account.
The consumer is then extended a credit limit that is equal – or perhaps slightly less than – the amount they have used as a collateral deposit. The cardholder uses secured credit cards just as they would any other credit card; they can charge no more than their credit limit and they are expected to make on time monthly payments. If payments continue to be late, the consumer’s credit score continues to suffer. And if the borrower defaults on the loan, the lender has the option to collect the money owed to them by way of the deposited collateral.
Who qualifies for secured credit cards?
Secured credit cards are meant for those individuals with poor credit who might otherwise not qualify for traditional credit cards. As long as the applicant has the money in hand to make a collateral deposit they can qualify for secured credit cards. Secured credit cards are also a terrific option for those just building their credit, such as recent graduates. They allow new credit holders to learn how to manage their finances, without too much risk. Many consumers might be surprised to learn that secured credit cards are offered through most of the major credit card companies.
Who benefits?
Both parties benefit from the issuing of secured credit cards. Lenders can extend lines of credit with no risk to them, as the collateral deposit acts as a safety net should the situation go downhill. For the consumer, secured credit cards offer an opportunity where one may not have existed before.
There are some non secured credit cards that extend offers to those with bad credit. These offers generally include low credit limits, high interest rates, and additional fees. The credit card companies charges these interest rates and fees in an effort to minimize their risk. While consumers may gravitate to non secured credit cards because it avoids them having to make a collateral deposit, the truth is that they will – more often than not – wind up paying far more in fees with non secured credit cards as they would by simply making the deposit required by secured credit cards.
Of course one of the most significant benefits of secured credit cards is the opportunity it affords to consumers who are struggling with their finances. Whereas such consumers may not be able to qualify for traditional credit cards, they can qualify for secured credit cards; and this opens a door for consumers to redeem their credit systematically.
Credit reports are compiled to reflect the credit history and standing of an individual consumer. It includes information regarding the consumer’s lines of credit, their history of making payments on time, and any issues they may have had with regard to defaulting on a loan. All of this information culminates in an overall credit score – a number that is assigned to a consumer that tells prospective lenders of the consumer’s creditworthiness; that is the probability that they will make payments on time. This is how lenders determine if an applicant is or is not a good credit risk. So it stands to reason that if a consumer is interested in rebuilding their credit it is essential that they begin with their credit report.
Through secured credit cards, consumers can begin the steps it will take to ultimately repair their credit as reflected on their credit report. This can be accomplished by making consistent, on-time payments, paying off the balance at the end of the month if possible, and staying well within the credit limit. Just as we have seen how consistent exercise and healthy eating can result in increased health, we will also see how a consistent financial “diet” can have an almost immediate impact on how we feel about ourselves and will ultimately pay off in terms of a “healthy” credit report.