I see a lot of talk online about secured credit cards, but it wasn’t until I was asked about them the other day that I gave them much thought.
I was asked specifically if someone with bad credit should use a secured credit card to help rebuild their credit score.
I had to do a little research to give them an accurate answer, which I thought I would also share with you.
So let’s discuss secured credit cards and whether you can use them to rebuild credit.
What are secured credit cards?
Secured credit cards are like a standard card but you must pay a deposit before you use it. This deposit works as collateral and will usually be the same amount as your credit limit.
If a secured credit card had a credit limit of £1,000, you would need to pay a deposit of £1,000 into the account.
You would pay the credit card each month if you spend on it as you normally would and treat it just like a standard credit card.
If you miss a payment or default in any way, the money, plus any charges, would be taken from your deposit.
You’re technically using credit as it’s a credit card but the issuer is mitigating their risk by using your deposit as collateral.
That’s why people with all kinds of credit scores can get one.
As it’s a credit card, the card issuer will report activity to the credit reference agencies.
Keep on top of the card and make all your payments and it will have a beneficial effect on your credit score.
Are secured credit card a good idea?
Yes, secured credit cards can be a good idea. They aren’t for everyone but if you’re in a typical financial situation and want to begin rebuilding credit, they can work.
If you’re trying to build or rebuild a credit history and want a manageable way to do it, a secured credit card can work.
You’ll need to be disciplined and use the same rules as standard cards though.
Set up the minimum monthly payment and try to settle the card balance in full each month.
Get into the habit of doing that and a secured credit card could be just what you need to help build credit.
The downside is that a secured credit card typically comes with fees. Some fees will be more expensive than others so it’s important to shop around.
Pros of a secured credit card
Good way to rebuild credit – A secured credit card is an accessible and manageable way to rebuild credit. You’re almost guaranteed to be accepted if you work and can begin rebuilding credit quickly.
Uncomplicated borrowing – A secured credit card works the same as any other card. If you buy something with it you’ll pay it back monthly at a fixed interest rate. You also have the option to pay it off in full.
Easily switch to an unsecured card – Many secured credit card issuers also offer unsecured (standard) credit cards. This can make switching away from a secured card much easier as long as you keep an eye on interest rates and fees.
Cons of a secured credit card
High interest rates – You should expect to pay a higher rate of interest than with a standard credit card. Even though the issuer has collateral, the card is still regarded as high risk with high default rates.
Charges – Most credit cards come with charges but those on a secured credit card are typically higher. Keep an eye on what a card charges and for what.
Low credit limit – A secured credit card will typically have low credit limits, as low as £300/£400. You’ll also need to be able to put down the equivalent as your deposit.
Secured credit cards and you
As you can see, secured credit cards can be very useful for rebuilding or building credit.
If you can stay disciplined while using it, pay the minimum and settle the balance in full every month, they can be a simple way to rebuild.
If you’re not so disciplined with spending or think you may have trouble with a credit card, perhaps this isn’t the right option.
What do you think of secured credit cards? Have you used one to rebuild credit? Tell us your story below!
