The Pros and Cons of Secured Credit Cards

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The Pros and Cons of Secured Credit Cards

In the modern age it can be tough to get by without a credit card. Everyday activities like renting a car, booking a hotel room or hopping on a plane can be out of reach without a piece of plastic to secure the transaction. Perhaps it’s time to consider a secured credit card.

The need for a credit card may be clear enough, but what if your credit profile is less than optimal? Or what if you are worried about overspending and racking up piles of high interest debt? If any of those concerns apply to you, it may be time to consider a secured card instead.

Traditional credit cards are classified as unsecured debt, meaning they do not require any collateral to open. Secured credit cards are different in that they are tied to a deposit you keep in a linked bank account. This model can have some important benefits, but there are some potential drawbacks as well. Here is a quick rundown of the pros and cons of secured cards.

Benefits of Secured Credit Cards

Secured credit cards can be powerful financial tools, helping their users rebuild their credit, establish credit, qualify for loans and avoid high interest debt. Here are a few of the good things secured cards have to offer.

Easy approval – If past attempts to get a credit card have resulted in rejections, you may want to try for a secured card instead. Secured credit cards offer fast and easy approval, and you could have your new plastic in a matter of days.

Great for first time cardholders – Using credit cards wisely is a bit of a learning game, and the education can be really expensive. Secured cards are great for first time cardholders, and some financial professionals even refer to them as credit cards with training wheels.

Impossible to overspend – Spending too much is easy when all you have to do is sign your name, but secured cards are different. Since the credit limit is tied to the amount you have on deposit, it is impossible to overspend.

Good way to rebuild credit – Secured cards are a great way for those with poor credit to reclaim their good name. Paying off their secured cards on time can help those with damaged credit boost their scores, making it easier to qualify for not only traditional credit cards but other types of loans as well.

Potential Drawbacks of Secured Credit Cards

As you can see, secured cards have a number of important benefits, but they are far from perfect. Here are a few potential negatives to consider before signing up for a secured card.

Requires a cash deposit – If you are strapped for cash and living paycheck to paycheck, coming up with the hundreds of dollars required may not be in the cards. If you are considering a secured card, you will need to find out how much you have to deposit and what rules you will need to follow.

Not all issuers report to credit bureaus – While secured cards can be great for establishing or rebuilding credit, not all issuers report payments to the three major bureaus. Before you sign up for a secured card, be sure to ask about their credit reporting policies.

Potential fees – Some secured card issuers charge high fees, including charges for balance inquiries, telephone support, deposits and other routine transactions. These fees can add up fast, eating into the amount you have on deposit and further reducing what you have to spend.

Few rewards – Compared to their more traditional counterparts, the rewards offered by secured cards can be pretty skimpy. You might earn some points or airline miles here and there, but you will need to search hard for a secured card with great rewards.

Secured cards can be valuable financial tools, especially for those with no credit and those recovering from a history of overspending and missed payments. But before you sign up, you need to know what you are getting into, so you can make a sound decision for your future.

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