Today, one of the issues that many young Americans face is their lack of credit and the task of building good credit. To do this, you need to be patient, careful with your spending, diligent about paying your debts and ingenious. One of the most common tips given to people who are trying to build credit is to open a secured credit card.
What is a partially secured credit card?
A fully secured credit card is very similar to prepaid debit: in the case of a secured credit card, you move money from any non-credit bank account into your secured credit card account, essentially eliminating any risk of you not returning your money to the bank since you will be spending your own money. With prepaid debit, you do the same thing, but the money is provided in the form of cash of a check deposit. For instance, you’ve deposited 400 dollars into your prepaid credit card account, now you can spend that 400 dollars and replenish the balance on the card. This will go on your credit report and help improve your credit score. There are also partially secured credit cards, where you’re given more credit than the amount of money you’ve deposited into the account. Partially secured cards are less common than fully secured credit cards.
Pros of using a secured credit card
The main reason why people use secured credit cards is their biggest advantage - it’s a great way to build credit if you have no other options left. They are an especially great choice for younger people who have a lot of debt or are planning to accumulate debt in the relatively near future, for instance, people who have unpaid college debt and are planning to buy a house.
A great thing about secured debit cards is that they only provide credit agencies with positive information about you, so you can improve your credit using fully or partially secured credit cards but you can’t really make your credit score worse. If you have a bad credit score, you can also use these cards to improve it and show your creditors that you have changed your patterns of behavior when it comes to repaying debt.
Cons of fully and partially secured credit cards
There are a few relatively small disadvantages to secured credit cards that are worth noting. While they can seem significant, they are definitely not a dealbreaker if a secured credit card is your only option for building credit. One of these drawbacks is that secured credit cards have relatively high fees and interest rates compared to regular credit cards. This makes them a worse option than a traditional credit card, so if you can get approved for a regular credit card, use it instead.
Another secured credit card con is that not all the card issuers report information to the Big Three credit bureaus, so you might be thinking that you’re building credit when, in fact, you’re not. So before applying for a secured credit card, make sure that the issuer reports information to proper agencies.
Finally, the last disadvantage of secured credit cards is that it takes a while for them to take effect. If you need to get money now or in a month or two, you won’t be able to improve your credit by that time using secured credit cards, so look into other ways to borrow money, such as peer-to-peer loans.