By Mory Brenner, Esq.
Secured Credit Cards For People With Bad Credit
Read about some secured credit card basics here or click to a more complete online site dealing with secured credit cards including pages on the bank accounts associated with a secured credit card, qualifications for secure card acceptance, benefits of a secured credit card, selecting a card, the application process and everyday use of secured credit cards including fees. In addition there you will find a section on secured credit cards vs. unsecured credit cards vs. debit cards vs. prepaid credit cards.
The concept behind a secured credit card makes perfect sense and can be easily understood when you think of each of its elements separately. Banks lend money to make interest while a loan remains outstanding and when the money gets paid back they make another loan. In order to make a loan the bank needs great assurance that repayment of the loan ranks as almost a sure thing. History teaches that making unsecured loans to people with bad credit yields a default rate so high any bank making loans regardless of credit could not survive very long. The question becomes how to meet the needs of people who want small credit lines, accessed by a credit card system, while providing the bank confidence loans won’t end up in default.
To bridge this gap banks ask for money in an account they can hold as collateral for the amount of the credit they extend in the form of a line of credit attached to a credit card. Note I did not call this account a savings account. In some cases the money is indeed held in what a consumer would call a savings account where they earn interest and they get a passbook or statement. Other banks hold the money in what they define as a collateral account and you do not earn interest. Some banks will not allow you access to the money in this account without closing your secured credit card while others let you make withdrawals with the knowledge that your credit line declines based on how much you take.
With an account to insure repayment of the credit line in place, the bank issues a regular credit card. In terms of the daily operation of the card and the credit reporting aspects of the card the consumer, credit agencies or businesses who accept the card will treat the card like any other credit card, because that’s exactly what it is. Keep in mind some basics:
|1. If you do not pay your balance you will owe interest, it does not matter that they have money to cover the debt in another account. (Note the concept of not owing interest when you pay your balance in full every month comes as a function of a grace period granted on most credit cards, keep a special eye out for this with secured credit cards because not all of them offer a grace period and you might incur interest charges for every purchase even if you pay in full each month.)
2. If you miss payments they will get reported as bad payments and make your credit worse just like missing any other credit card payment and it will not matter that you had money in another account to cover it.
3. You will have a strict limit on how much you can spend with the card and if you go over you will get rejected by a merchant or incur over limit fees.
In addition to offering grace periods or not your examination of various secured credit cards should including watching for more items like if purchase benefits come included such as rental car insurance, if the card’s carries association with Visa or MasterCard, Interest rates, annual fees and other fees and to what extent the credit card reports to the three main credit bureaus.
For many people using a secured credit card as a vehicle to improve their personal credit score emerges as the top reason for obtaining a secured credit card in the first place. It becomes very important then, to know that not all secured credit cards report to the credit agencies. Do your research and examine the specifics of a secured credit card before you apply for it. Two credit reporting agencies might be good but all three is best. Stay away from secured credit cards that do not report at all unless you want the secured credit card for a reason unrelated to improving your credit score.
For those looking to boost their credit score secured credit cards stand out as one of the best methods to achieve the goal. I encourage people endeavoring to improve or establish credit to keep up a good payment history on three accounts. For those without access to any other way to get their credit moving in right direction, secured credit cards provide such a good solution you might even want three!