Secured Credit Cards - Using Them To Your Advantage

In a lot of ways, secured credit cards appear to be a raw deal. However, if you have bad credit, secured credit cards may well be your ticket to an ideal credit rating.

Basically, secured credit cards-typically for those who have bad credit-require that you pay an initial deposit which is equal to or over the limit before the card will be activated. Then, you may use the account as you would any other credit card. You would also pay the bill, just like you would any other credit card.

So, let’s imagine that you have a secured credit card which has a limit of $500. In order to open the account, you would need to make a first deposit of $500. Subsequently, you could charge $200 worth of stuff on the card.

Will the secured credit card company automatically apply the deposit to your balance? Nope-you need to pay the $200 bill, just as you would with every other credit card. If you make payments, the balance will incur interest. And if you miss payments, the late payments will be reported to the credit-scoring bureaus, and your credit scores will suffer, just as with a conventional (unsecured) credit card.

At the same time, the bank holds onto your deposit. Should you eventually default, the credit card company keeps your deposit, but only once they have turned you over to a collection agency and attempted to collect payment from you.

In a nutshell, secured credit cards require you to pay now, buy later, and pay again, whereas traditional credit cards let you buy now, pay later.

If you make payments promptly and learn to build credit, you can eventually request that the secured credit card be transferred to a regular credit card, after which the bank will refund your deposit. The deposit is likewise refunded if you close the credit card account, if you don't have a balance at the time.

Even though secured credit cards might not exactly seem like that great of a deal, they're necessary for two reasons. First, people who have bad credit often simply cannot qualify for traditional credit cards, so secured credit cards allow them to build their credit ratings (in this way, they're simillar to authorized users). Second, many businesses require that their customers have credit cards. For example, most mobile phone providers won’t give you a phone without a credit card-secured or otherwise.

As I mentioned, if you pay the bill on time and keep your utilization rate (the percentage of the balance held against the limit) under 30 percent, then a secured credit card will help your credit rating just like any other credit card would. And as your credit card score begins to improve, it is possible to contact the credit card company and ask if it can switch the credit card to unsecured.

While secured credit cards have high interest rates and force you to set aside a considerable amount of money as a deposit, they are an attractive way for you to rebuild your credit. Utilize them in the right way-with careful purchases and repaying your debt on time-and you’ll soon be back within the good graces of your credit card company.

By: Phil Tirone

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