Credit cards offer many benefits, but it’s difficult to qualify for one if you have bad credit. One of the reasons that lenders shy away from giving this line of credit to people with poor FICO scores is that they’re unsecured. You don’t give the lender any collateral to secure the credit line. If a borrower decides to default on their payments, the creditor doesn’t have any assets that reduce the loss.
A secured credit card is backed by collateral, so they are available to borrowers with low scores. The lender may request that you secure the credit line partially or fully with a deposit. For example, you get a card with a $500 credit line when you put that much into the deposit account. You can use the card like it’s a standard credit card, but you do have a few things to keep in mind before you apply for a secured card.
Do Your Homework Before Application
Secured credit cards often come with a lot of terms and conditions that can trip you up on the path to a better credit score. The first thing to look at is whether there’s an annual or monthly fee associated with the card. Some lenders request a substantial fee that gets taken directly from your credit line.
The interest rate is another area that is high compared to many unsecured credit cards. This fee is based on the balance on the card, so it’s less of a concern if you pay in full every month. Pay attention to other fees in the contract, such as over limit and late payment, so they don’t take you by surprise.
The minimum monthly payment is the lowest amount you pay to keep the card current. This bill only applies if you have a balance on the card. The required payment varies between creditors and will be listed in the terms and conditions, along with your bill.
How to Find Secured Credit Cards
Many financial institutions have secured card options
, so check with your bank or credit union as a starting point. Major credit card companies, such as Discover, also offer secured cards directly. Since you provide the starting deposit to secure the credit line, you typically don’t need to worry about having a particular credit score to qualify.
The application process is similar to an unsecured credit card. The deposit amount is taken from your bank account and held in a savings account maintained by the creditor. Some companies give you a path to upgrade to an unsecured card after you make a certain number of payments. If you upgrade or close the card, you get your deposit back.
What You Should Watch Out For
The best way to use a secured credit card as a way to build up your credit score is to pay off the balance every month. You avoid paying any interest fees with this approach. If you have to carry a balance, pay close attention to how much available credit is left over. Otherwise, you run the risk of an over the limit fee. If the creditor offers auto payment of the minimum, get that set up so you don’t have to worry about late fees. Secured credit cards give poor credit borrowers a way to enjoy the flexibility of credit card payments while you rebuild your score. When you know exactly what you’re getting into with this type of account, you can determine whether it’s the best choice for your financial future.