A secured credit card is a vehicle by which you can purchase needed items or services. Here, we explain the theory behind these cards, their and benefits that include the chance to improve upon low credit scores and purchasing ability.
Credit plays a prominent role in your life as a consumer. Without it, you may find buying a home or car or getting major personal and household needs met difficult. A poor credit history can deny you access to the purchasing power afforded by credit.
How a Secured Credit Card Works
The issuer of a secured credit card relies upon a bank account to back your repayment obligation. To get one of these cards, the bank will require you to deposit a certain amount of money in a bank account. This can be a checking account, savings account, certificate of deposit (CD) or a money market account.
Depending upon the bank, a CD may represent the preferred method of security. Unlike a checking or savings account, you cannot withdraw money from a CD for a particular period of time without incurring a penalty. This assures your bank that its collateral won’t disappear.
With a savings account, you can withdraw funds without a penalty — to a point. Banks impose a limit of six withdrawals from your savings account in a statement period. When you request more than six, the bank will likely deny you. Too much of you taking money out of savings may convert the account to a checking one. As such, savings accounts also prove effective as collateral.
Some banks require you to have an existing customer relationship, such as having a checking or savings account or some other account.
So that the bank will have some cushion should it need to collect from you, the credit limit is a percentage of the amount you have deposited in your account. Suppose you place $1,000 in the account that will secure repayment of the card balance. If your bank caps use of the card at 50 percent, you will have a credit line of $500. You may be able to find a bank that will grant credit lines above the amount of your deposit or account balance. This is especially the case should you demonstrate consistent, on-time payments.
What Are the Benefits of a Secured Card?
Serious blemishes to your credit history come from bankruptcies, judgments, and foreclosures. These events remain on your credit report for numerous years.
Secured credit cards help you improve your credit scores in history. With this card, you can start to demonstrate a history of repaying debts. Even a period of six consecutive months of paying in a timely manner can add points to your score. FICO, which stands for Fair Isaac Corporation, basis 35 percent of your score upon whether you pay on time. With the on-time payments also comes the ability to build a more lengthy credit history. The length of time with credit accounts for 15 percent of your credit score. As such, you can consider secured credit cards to be good credit repair tools.
Having a secured card also assists you with budgeting and financial responsibility. Usually, these instruments have relatively low credit limits. As a result, you are less likely to accumulate and face large debt balances. This forces you into a selective mentality on purchases and otherwise the use of credit. You may find yourself more likely to limit use to particular needs such as repairs on your vehicle or home appliances.
Even if you purchase a luxury item, you won’t have a particularly large debt to leave on your hands. With this form of secured credit also comes anonymity. After all, these are credit cards and look like any unsecured one you would otherwise have. The store clerk or any curious minds in the checkout line cannot tell that your card is secured.
How Do I Find the Best Option?
Start with your bank for secured card options. Banks with whom you already have accounts or business have more willingness to issue secured credit to you.
If you don’t already have a bank, choose a major, federally-insured national bank into which you can deposit money to open an account. These larger financial institutions provide a vast array of products, including secured credit cards. Employees of for-profit companies and government agencies qualify as members of credit unions. If you belong to one, you stand better odds of avoiding annual fees. On the whole, those credit unions that do charge annual fees charge less than banks.
Many sites list for your consideration possibilities for the best option. Consult sites you may find from an internet engine search. Examples include CreditKarma.com and Bankrate.com.