Using Secured Credit Cards to Their Full Advantage

Although there can be extra costs associated with secured credit cards, they do provide an avenue for individuals considered a high credit risk to build initial credit or repair their credit. People who have never had credit before or who have bad credit for any other reason are considered high risk. For those who find themselves in this situation, a secured credit card can offer them all the conveniences of having a credit card while building their credit ratings.

Others considered high-risk applicants for credit include college students, newlyweds or those who have never owned a credit card. These people may find it difficult to establish credit. Lenders are more cautious of the financial risks they take in the aftermath of the government bailouts and intense scrutiny to which the industry is increasingly subjected to. The infamous Catch-22 of “you need credit to get credit” can prevent many lenders from considering extending a credit line to someone who has not proven his or her reliability.

Likewise, lenders are hesitant to extend credit to people who have demonstrated poor financial judgment in the past. Someone with a history of late payments, loan defaults, or bankruptcy poses a different type of risk to lenders, and it takes that person some effort to re-establish their reputation as a reasonable credit risk. In addition, someone with a sporadic work history or who has not been in his or her position long may be considered high-risk because the lender has no way to gauge his or her financial stability. In these situations, the person seeking credit has to demonstrate a renewed ability to make payments on time.

One of the easiest ways to rebuild credit is through a secured credit card. This type of card operates the same way as an unsecured card but requires the card holder to make a deposit to “secure” the balance on the card. Typically, this deposit is between $200 and $500. Depending on the terms for the card, the deposit determines the account’s credit limit. Often the credit limit will be equal to the deposit but some lenders set the limit at a percentage above or below the deposit amount. If the cardholder misses a payment, it is taken from the deposit amount.

Customers interested in obtaining a secured credit card should be careful to read the fine print or details for the account they wish to open. Some secured credit accounts charge an application fee, annual fee or monthly fees. All of these will increase the costs of having such a card and can reduce the credit limit. The interest rate on secured credit cards can be much higher than the rate on an unsecured card. One advantage to a secured card is many accounts allow the initial deposit to earn interest. If managed properly, the cardholder will receive more money back when they close the account than they spen t to open it.

The best way to use a secured credit card to rebuild credit is to make a couple of small purchases with the card each month, then pay off the balance completely during the grace period before the interest rate is applied to the balance. Making only minimum payments each month causes the interest rate to be applied to the balance, which can very quickly get out of hand.

After owning a secured credit card for a set period and making regular on-time payments, many lenders will offer the option to upgrade to an unsecured card. This period is typically one year. Cardholders should take advantage of this option because holding onto a secured credit card longer than necessary can adversely affect a person’s credit rating. Unsecured cards sometimes offer lower interest rates, no annual fee, and larger credit balances. Once a customer qualifies for an unsecured card, it is in his or her best interest to switch.

The ability to plan carefully and manage one’s financial future is a learned skill and, unfortunately, many people learn some hard lessons before mastering it. Many common mistakes can be avoided by taking the time to understand the available credit options. However, for those who has already made mistakes and learned their lessons, a secured credit card can be an intelligent stepping-stone toward a stronger financial future.

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