Can a secured credit card be a valuable tool to build credit? Imagine hitting a rough patch in your finances and having your credit card accounts closed by your lenders. Having a credit card is useful for many things — including renting a car, reserving a flight on an airline and paying for purchases online — so this could prove to be very inconvenient, if not disastrous.
Many Americans who face the above scenario might consider applying for a secured credit card in order to re-establish their credit profiles and enjoy the convenience of paying with plastic. These cards provide a credit line that usually matches the same amount of cash you deposit with the lender as collateral, but there are things to consider when deciding if this option is right for you.
Building your credit profile: Banks that provide secured credit cards report your payment activity to the credit bureaus. If you manage your account responsibly, this may work in your favor.
Getting a credit card under "impossible" conditions: Secured credit lines may be available to those with major derogatory items, such as recent collections, who would normally be rejected outright for a regular card.
Spending discipline: A secured credit card will generally not allow you to go on an irresponsible shopping spree for thousands of dollars because the credit limits are usually quite small.
Graduating to an unsecured card: If you pay on time every month, some lenders may convert your credit line to an unsecured one after a certain period of time, such as a year.
Earning interest: Some lenders may pay a small amount of interest on the amount you have deposited to secure your line.
Small credit limits: While traditional cards might offer credit lines in the tens of thousands, most secured credit cards only allow credit lines of several hundred dollars, curbing the purchasing power of each account.
Higher rates and fees: A secured credit card may cost you more to own and use than a traditional card. Expect a higher interest rate and annual fees from most lenders — some may charge a monthly fee to keep the account open.
Your deposit is at risk: If you don't repay your balance, your lender may keep the money deposited to open the account.
Predatory lending: While most lenders in the secured credit card business are legitimate, be wary of those offering terms too good to be true or requiring you to purchase items as a condition of issuing the card.
To sum up, a secured credit card may be a tool you can use to improve your finances if managed wisely. As in any other financial transaction, you might want to shop around and compare cards from various lenders to find the best possible terms. Once you open an account, take advantage of TransUnion credit monitoring tools to see how your secured credit card is affecting your profile.