There’s a debate about whether secured credit cards are good or bad. Personally, I don’t think good or bad is the best way to look at them, but rather weigh the pros and cons.
Secured cards are a good way to establish credit, especially for students, people who have had credit issues in the past, and foreigners who come to the U.S to establish credit.
In fact, a 2016 report from the Federal Reserve Bank of Philadelphia stated having a secured card open for two years could be associated with a 24 point increase in median credit scores.
First let’s define a secured credit card. A secured card is a card that allows you to charge purchases, up to a specific limit and make monthly payments like a traditional credit card. You also get charged the interest or APR if the balance isn’t paid in full for the billing cycle.
Now, just as I said, let’s get into the pros and cons of secured credit cards.
Can help build credit — Secured cards are a good option if an unsecured credit line is unlikely. You aren’t always guaranteed approval but with the checking of your credit report and annual income, you can still be approved with low or no credit. Keep in mind, don’t close the account unless your upgrading to an unsecured credit card.
Building good habits — These cards can help you get into the habit of monitoring spending due to the limits and being consistent with making payments on time.
May offer perks that unsecured cards can’t — Some benefits come with these cards such as travel insurance, cellphone protection, credit-monitoring, ID theft alerts, and in-house offers. Some cards even have rewards points like cashback.
You could upgrade to an unsecured card — Since banks know these cards aren’t meant to be used forever, converting to an unsecured card is possible. The institutions will do automatic reviews after a certain time period and if you are responsible, and conversion to an unsecured card could occur.
Security deposits — Secured cards required a deposits. This could be challenging since there is a chance the applicant could already have financial issues.
Fees- Although secured and unsecured credit cards have fees, secured cards charge in the range of $18 to $125, with average around $30.There could also be monthly program fees, paper statement fees or a fee for the cash security deposit.
Low Limits- You probably won’t be buying that ultra 8K tv with a secured card since they tend to have lower limits. Most card issuers allow for limits around $200 to $500. What this will also mean is that keeping your credit utilization low could be challenging. If we want to stay between under 30% usage, that means we can only use $150 on a card with a $500 limit.
May not be able to upgrade- This may sound like a contradiction to the last point in the “pros” list, but notice I said “YOU COULD UPGRADE…” This means it’s not a guarantee so it’s best to check with the company to see if they upgrade secured cards prior to applying for one.
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