Any time you borrow money, especially from a bank, you can expect to pay interest. Credit cards are a form of borrowing — and an expensive one at that. Secured credit cards are typically used by those looking to build or rebuild a credit history, and those types of borrowers represent a higher risk from a lender’s perspective. Thus, rates on secured cards can be high. However, secured cards carry both advantages and disadvantages for borrowers. Here’s a look at how they compare, and why you can expect to pay a high interest rate with a secured card.
Secured vs. Traditional Credit Cards
A secured credit card requires a cash deposit to “secure” the repayment of any amount borrowed. Credit cards with no deposit required are known as unsecured cards. With traditional, unsecured credit cards, lenders rely on the ability of the borrower to repay the charges on the card, without requiring any collateral. Traditional credit card issuers use credit scores to determine the ability of unsecured borrowers to pay back a loan. Secured credit card issuers can always confiscate the cash on deposit to pay off any charges placed on a card, so credit scores are not as important for secured card lenders.
Advantages and Disadvantages of Secured Credit Cards
On the plus side, secured credit cards for those with limited or bad credit provide the opportunity to build a credit history. Since secured credit cards require a deposit, they are open to many borrowers who otherwise couldn’t qualify for traditional, unsecured credit cards. Plus, over time, responsible use of a secured credit card is typically a path to a higher credit score, and possibly the offer of an unsecured card.
On the negative side, secured credit card limits are usually low, and they are often limited to the amount of collateral a borrower can put on deposit. Secured credit card interest rates can be lower than the highest unsecured rates, but they won’t typically be as low as the best credit card interest rates offered to a borrower with a high credit score.
Using a Secured Credit Card
A secured credit card might be the best option for the following types of borrowers:
- You’re an applicant with a limited credit history, such as a student
- You have a low credit score
- You have trouble getting your own unsecured credit card
Before you sign up for a secured card, make sure you understand all the features and benefits, including the following:
- All of the credit card rates and fees, including annual fees, sign-up fees, and interest charges
- Whether or not the card reports to the credit bureaus
- How large of a deposit you must make, and what your associated credit line will be
- How long until you’ll have the opportunity to get an unsecured credit card
Understanding all aspects of secured credit cards can help you decide if they are appropriate for you.
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