Not keeping up a good credit score? Having a bad credit score should not stop you from getting a credit card. If you have a bad credit score and fear that credit card companies might not entertain your request for issuing a credit card then, a secured credit card is what you should go for.
The credit score is a value ranging from 300 to 850 which is allotted to you and represents your ability to pay back credits. The financial institutions use this score as a criterion to determine your creditworthiness and if your credit score is bad, say within a range of 300 to 579, then the credit card companies may decline your request for issuing a credit card. You need not worry as we are going to tell you about secured credit cards, a credit card type that you can opt for despite a bad credit score.
This article covers the following aspects:
- What Is Meant By Secured Credit Cards?
- Who Are The Users of Secured Credit Cards?
- How Secured Credit Cards Work?
- Secured Credit Cards vs Unsecured Credit Cards
- Tips For Choosing The Best Secured Credit Card
Let’s dive in!
What Is Meant By Secured Credit Cards?
A secured credit card is a type of credit card that requires the cardholder to furnish security in the form of a cash deposit. This deposit serves as collateral for your account and in case you default in credit card payments then the credit card issuer can cash in this deposit to satisfy the charge reflecting in your account.
Other features are similar to that of a normal credit card and you can spend through your secured credit card up to your credit limit. You can consider applying for a secured credit card if your credit score is not satisfactory.
Who Are The Users of Secured Credit Cards?
Not everyone would like to block their funds in a security deposit and avail the credit facility offered by secured credit cards. Only those persons who have a poor or little credit history opt for secured credit cards. This is because they have low credit scores and their request for a regular credit card is normally declined by most financial institutions.
With secured credit cards, the financial institutions are saved from the risk of loss on account of a default by the cardholder due to the presence of a security deposit. The persons with bad credit cards are thus able to get secured credit cards issued in their favor and they sometimes use it as a tool to improve their credit score. If you are wondering how you can do that, then we can tell you the way out for the same. You just need to maintain discipline in regular credit card payments and over time you would see your credit score improving! After a certain period, say a year your credit card company might even entertain your request for an increase in credit limit attached to your card. All you need to do is be regular in the payments.
How Secured Credit Cards Work?
When you apply for a secured credit card, the credit card company runs a hard inquiry on you. To be specific it scans through your credit history available with the credit reporting agencies to determine your credit score. Based on how bad your credit score is, the company determines an amount of security deposit that you need to submit with the company which serves as collateral. Based on the amount of security deposit your credit card limit is set up, which approximates the amount of security deposit.
Regarding how a secured credit card functions, you can note that a secured credit card works on similar lines of a normal credit card. This means that you make your purchases and you get charged for the same. A monthly credit card statement is served to you which contains the details of your spending and the interest charged on your card. Make sure that you do not default in the payments as it will lead to a further downfall in your credit score.
Secured Credit Cards vs Unsecured Credit Cards
Apart from the fact that a secured credit card is backed up by the security deposit provided by the credit cardholder, there are many other ways in which a secured credit card is different from an unsecured credit card or a normal credit card.
APR and Other Fees
Annual percentage rates (APRs) are more in the case of secured credit cards. This is another way in which the bank insures itself against the risk of non-payment. Higher APRs work as an incentive for the banks for the additional risk they incur by issuing credit cards to those with a bad credit card. There are other fees as well such as monthly maintenance fees which is higher in case of secured credit cards.
Role of Credit Score in Application Process
When you apply for an unsecured credit card then the issuing company conducts a hard inquiry on you for determining your credit score and based on the credit score and your credit repayment history, the company decides whether to approve your credit card application or not.
On the contrary, secured credit cards do not have any requirement for a minimum credit score for approving your application. The credit card company before issuing you a secured credit card assesses your credit score only to decide your credit limit and the amount of security deposit. Thus, secured credit card applications are processed without being affected by your credit score. That is the beauty of secured credit cards; your application is always approved.
Reward Offers
Secured credit cards generally do not confer any reward offers to the cardholders. The purpose of these credit cards is to help the holders improve their credit score. The holders of unsecured credit cards enjoy reward offers based on your credit utilization.
Tips For Choosing The Best Secured Credit Card
Don’t rush when you are applying for a secured credit card. You want a card that meets your needs but is convenient also. That’s why here are some tips that we suggest you follow before applying to a secured credit card:
Security Deposit That You Can Invest In
Generally, the credit card companies require a minimum deposit of $200 to $300. You can deposit a higher amount also if you want a higher credit limit. But you should not invest a higher amount just to get a higher limit. Make sure that you have enough funds available with you and the capacity to block them in the form of a deposit.
Credit Reporting Requirements
If you are taking a secured credit card to improve your credit score then you would want your payment details to be reported to the Credit Bureaus so that your credit score reflects better. Having a secured credit card that doesn’t report your payment activity seems worthless.
Compare Fees
The credit card company might be charging different types of fee such as annual maintenance fees or processing fees. You must compare what other credit card companies are charging on secured credit cards and then decide which company to go with. In fact, many secured credit card companies might not charge annual fees at all. It is better to compare and then decide as to which company charges you better.
Availability of Grace Period
Sometimes, secured credit cards might not come up with the feature of a grace period. So, it is better to ask beforehand and ensure that the card that you chose has the option of a grace period. This is because in case of some inadvertent reason you miss the due date of payment you do not suffer.
If you are also looking for a credit card product that offers you the credit card facility despite having a bad credit card, then you can consider secured credit cards. Further, use it as a tool to improve your credit score by making regular payments month to month.
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