What is a Secured Credit Card and Should I get one?

As much as most credit experts will steer you away from credit cards, sometimes you may feel like you do not have a choice. If your credit is shot because of write-offs, debts and late payments, you may not qualify to get a loan for a car or a home. Most lenders require a fair credit score before they will even consider you for a loan and getting your credit score back up after a major fall can take a while.

If you decide that you want to use a credit card to help bring up your credit, you may have to choose a secured credit card. This card protects the company and allows you to build your credit. If you are a low income earner, a pre-paid credit card or secured credit card may be the only card you qualify for.

What is a secured credit card?
To be honest, a secured credit card sounds an awful lot like a debit card. In order to obtain a credit line you must deposit a certain amount of money as collateral. Typically, these cards require a minimum of $300- $500. Whatever you deposit into your account is the amount of money you can charge. So if your collateral is $450, you will usually have a credit line of $450.

 
What is the difference between a secured credit card and a debit card?
The primary difference is that the credit card acts as a credit card. When you charge money onto a debit card, the cash comes out of your balance. When you use a secured credit card, the debt works as a charge. Your collateral does not decrease. This means that if you have$450 collateral and you spend $100, you have a credit line of 350 leftover. However, your collateral remains $450 and if you pay the balance off, you can charge up to $450 again. Essentially, the money you deposit works as a guarantee that you will pay. If you do not, they take the cash.

Additionally, if you make timely payments, your credit line could increase without the need to add additional money to your collateral.

How do I choose a good secured credit card?
If you choose to go this route to help improve your credit, choose a card that has a low (or preferably no) annual membership fee. You should also research different cards online. Check out customer reports and read the fine print. Skip cards that charge application fees and other miscellaneous fees, as these will eat away at your credit line. Check with your bank first to see if they offer a secured credit card. Be fully aware of terms as the costs of borrowing can high and you can lose your security, possibly consider other borrowing options first.

How do I use a secured card properly?
Remember, the purpose of this card is to improve your credit score. To do that, keep your balance relatively low. Ideally, you should never spend more on the card than you can pay off in one month. You should also pay your bill on time every single month. Timely payments and debt to income ratio major take a toll on your credit score. Set it up for automatic payments if you must, but do not be late.

 
Credit cards are rarely a good idea. A secured card does offer benefits in that you have money invested so you are more willing to pay the account on time. Only use this option if you know you will pay the balance off every single month.

If you are in need of some emergency or extra cash, consider money help through non-profits or government benefits – there are loans with favorable terms to apply for.