There are many myths about Secured cards that we would like to address in this post. But the usual understanding, that a secured card helps establish credit is correct in most cases. Let’s understand what a secured card is.
Secured Card, as cited on Wikipedia is a credit card that’s secured through a deposit made by the cardholder. Unless specified, a credit card is usually unsecured which means you don’t have to secure the line of credit provided to you with cash or a cash equivalent commodity (like real estate). The deposit is used as a collateral to decide the amount of credit the card-holder can obtain.
How it works
Step 1: The cardholder would deposit a certain amount of money and then the issuer will provide a credit line equal to or more than that amount.
Step 2: Cardholder can then spend that money for monthly expense and pay back just like a regular card
Step 3: At the end of the contract (usually 12 months) the issuer returns cardholder’s deposit back.
Most Secured Cards charge you a fee for these services.
Secured cards are like gift-cards where you get to spend as much deposit you put in.
The moment of truth: It is not true that your credit limit is always equal to your deposit, in some cases the issuer may give cardholder a credit line in excess of their deposit based on the credit report.
You can never get declined for a secured card
The moment of truth: There are many scenarios where you can get declined for a secured card even though its rare. It all depends on the credit report.
Secured Cards always help you improve credit score
The moment of truth: Secured cards are not always the best way to improve your credit score:
- If you are new to credit and have never had credit before, secured card can be a good place to start since most of them report to all bureaus. If you start paying all your bills on time, it would be reported as a good payment behavior on your credit report. So, it will help you in two ways, reporting a trade-line and reporting good payments, both of which are essential in establishing good credit.
- If you are someone who has low credit because of a lot of balance that is delinquent or in collections, secured card may not help you as much. Since, you are already under debt, arranging for deposit and the fee can be difficult and would usually mean digging deeper into the debt hole. Moreover, even if you pay on time, at the end of contract your other balances will remain the same. In this situation you should focus on paying off the already accrued balance instead, which will definitely improve your credit score.
Please let us know if this was helpful and you can reach out here, should you have any additional questions.