Let’s talk about secured credit cards! To start, I would like to establish that they are credit cards… Yup, they’re just credit cards. They work in a similar fashion as your standard credit card, but there are a couple of key differences between a secured and a standard offer.
Let’s talk about who a secured credit card is for. Secured card holders are people who could not have qualified for a normal credit card which means they lacked the credit history for a successful application.
Remember my article about the basics of a credit score? People who have either low or no credit scores are typical candidates for a secured credit card. It is viewed as a safe line of credit (for both the lender and card holder) for a new card holder to establish a reputable credit history. In some cases, it’s the first credit card people can get, and in others, it’s the only option they have left after a long, arduous journey of ruining their credit.
Why is it safe? Secured credit cards come with limitations that other cards lack. For starters, they typically have much lower credit limits, so holders can’t rack up $5,000 in debt during a cycle. While also low, a secured card’s credit limit is defined by a security deposit that applicants are expected to put down after being approved. Since a deposit is backing the credit limit up, the line of credit is backed up, or secured, and lenders have a bit of leeway in case the card holder messes up again.
Aside from the credit limit, there are a few other typical differences to expect.
Typically speaking, secured credit cards do not offer a special set of benefits such as cash back or 50,000 points. While there are options out there with cash back rates, the expectations for credit card rewards should be low. Look at it this way, the reward is the ability to build credit.
Another typical difference between a secured card and standard is the annual percentage rate (APR! I remember these!). Most secured cards associated with higher APRs compared to standard offers. Since these card holders are deemed riskier by card issuers, they usually have to deal greater interest charges for messing up.
Well, there you have it. A secured credit card is a credit card offer meant for people with low or no credit who need to build a reputable credit history. This is the main goal of a secured card, establishing credit. The main incentive for a secured card holder is to successfully manage the secured card for some time and apply for a new line of credit. With the new history, he or she is more likely to qualify for a better credit card!