This is how Secured Credit Cards Work:
There are many steps that can be taken to build or repair credit, and one very effective way can be to get a secured credit card. How do secured credit cards work? Mainly they help through building up your credit score. Additionally they can be especially helpful if you are attempting to change bad credit habits. We have included some of our favorite secured credit cards available at Credit Card Sir for your perusal.
How they Work:
Secured credit cards require a deposit most often equal to the line of credit issued up front, before an amount is charged to the card. Any subsequent purchases are deducted from the credit limit, and balances must be paid as with a regular unsecured credit card. The deposit you paid to receive the credit card is kept simply so the credit card company that issued you the card is guaranteed some funds if you were to default on the loan.
Some companies pay you a small bit of interest on your deposit, while others keep it in trust until you have cancelled the card – you do not have to add money onto the card each month to use it, you simply pay the balance each month. Secured credit cards report your credit activities to credit bureaus, which means your credit score will build up by using them properly.
How they differ from prepaid cards:
The benefits of a secured credit card over a prepaid card is huge – with a secured card, you are building your credit history, often either from the beginning or repairing it from previous monetary mistakes. With a prepaid card, they do not report activity to credit bureaus, so they do not affect your credit score at all. You simply make a payment on a card, and then use that balance to purchase items. The point of using a credit card is most often to affect your credit score, so a secured card is the way to go.
What to watch out for:
Make sure to read all the fine print when signing up for a secured credit card. They should report to at least one credit bureau of the three major credit reporting agencies (Equifax, Experian, and TransUnion) or else the benefits of applying for a secured card are negated. Also be wary of cards that require a deposit that is larger than the amount of money you will get initially. If you sign up for a credit card that gives you a limit of $500 for your $1,000 deposit, you might want to be suspicious. Your deposit should give you at least as much in credit as you put in. On the other hand.
You also want to think about deals that offer you a very small deposit amount in return for a large line of credit – make sure they are not too good to be true. Ensure they are a reputable company, and that your hard work in paying your bills will be tracked. That is why you got the secured credit card, after all.
Interest rates may be average to above average on a secured card, so make sure that you are paying your balances off as soon as possible. You do not want to end up in the situation you were in to get a secured card in the first place by creating a large balance and paying high interest fees every month. You might not be able to avoid getting a high interest secured card, but just be aware of what you will be charged each time you leave a balance on the card at the end of the month.
Other points to consider:
If you are getting a secured credit card because you need to rebuild your credit score from your past poor habits. Make sure you are able to pay your bills on time, and if it is easier for you, make small payments throughout the month. This will also help to keep your credit to credit limit ratio low, which is better in the long run for your credit score. If you are always spending the entire amount of your credit limit each month, making small payments will keep the balance on the card at less than 100% full.
If you are just starting out with credit, you might find that a secured credit card is the only one that you will be able to apply for. This is because you have no established credit history, but of course that can be built up with your secured card. Once you have successfully created a credit rating and shown that you are able to use credit cards responsibly, you will be able to apply for a regular credit card that does not require a security deposit. Even if you are able to qualify for a regular credit card with no credit history, a secured card is still a good option for getting your feet wet in the lending business.
Most secured credit cards are pretty straightforward – you pay a deposit, you get a credit limit in return. There are a few, however, that can offer rewards, which might be something you are interested in. Rewards on a credit card can give you an extra benefit to having and using the card. Redeem rewards or earn cash back for money that you are putting on your card. As with all cards, just be aware of what is being offered. If the lure of rewards is perhaps to distract you from a high interest rate.
If you are able to pay off the credit card in a timely manner, the interest rate may not be a factor in the card you choose. Rewards offered might be exactly what drew you to the card in the first place. As long as you do your research and understand what you are getting with the card you choose, secured credit cards tend to be a sensible way to build and repair your credit score.