Secured credit cards can be fantastic tools for people who need to rebuild their credit ratings. Similar to debit cards, secured credit cards can be used for making a wide range of purchases with predetermined lines of credit -- usually in smaller amounts like $500. The catch is that in order to unlock that line of credit, you must make a deposit of that amount to your bank or credit card company. If you have a bad credit rating, then using a secured credit card can help you by establishing good financial habits with your financial institutions. Keep in mind that these banks and credit lenders generally report to the large credit bureaus, meaning good habits with secured credit cards will ultimately help re-establish your credit score. Are you considering applying for a secured credit card with the goal of rebuilding your credit? If so, being aware of the following myths and facts can help get you on the right track.
Make sure any secured credit card you get has a grace period on repayments. Otherwise, there's no way to avoid paying interest on your charges, and there's no need to overpay on everyday purchases.
Banks may leave a margin between your credit limit and your secured card deposit in order to protect themselves from being left with unpaid bills. This is fairly normal though and shouldn't dissuade you from applying for a secured card.
The best way to build a positive credit score is to constantly spend and repay small amounts on your secured card. Whenever possible, avoid carrying a balance that takes of a majority of your credit limit.
As long as you can pay your deposit and application fees, then you're virtually guaranteed for approval because the bank has nothing to lose. That's what makes secured credit cards so useful for people who have little to no credit histories.
Credit unions tend to have better reputations than banks as being more favorable for their clients. However, not all credit unions offer secured credit cards, and many credit unions don't report to all three of the major credit card agencies. When getting a secured card, you want to make sure the results of your good financial habits are being reported as widely as possible.
Most people who maintain their secured credit cards without being late on payments are eventually upgraded to normal credit cards. It can take up to a year for this transition to happen, and some financial institutions will tell you upfront when to expect an upgrade.
Some banks, credit lenders and credit unions offer interest on deposits for secured credit cards. In other words, if you deposit $500 for your card, then that deposit functions similarly to a $500 savings account -- assuming you make all the payments on your card. Later, if you cancel your secured account or upgrade to a normal credit account, then you'll get that money back with interest.
Do your homework when choosing a secured credit card, or you may end up paying too much in charges and fees. Get several offers for secured credit cards and compare them side-by-side to see which plans come with fewer strings attached.