Money is tight in America, especially around holiday periods. To help manage that reality, millions rely on credit cards to help them pay for today’s expenses over the course of subsequent months or years.
Expenses people use credit cards for are as broad as the people who apply for them. Emergencies, food, shopping, vacations… The list goes on.
Unfortunately though, getting a credit card isn’t as easy as just applying for one. In order to qualify for most credit products, you’ll need a good credit score.
If you don’t have the credit score required to get a good credit card, you may be considering getting a “secured credit card” which offers services to a wider range of applicants.
But what is a secured card? Is it right for you? Why are unsecured credit cards better?
Below, our team answers all of those questions and more.
What is a Secured Card?
A secured credit card is a like a standard credit card except it requires a cash deposit in order to use it.
For example, if you got a secured credit card and deposited $500.00 into your account, you could now borrow up to $500.00 from your lender. If for whatever reason you don’t make your payments on time, lenders will just pull what you owe them from your deposit.
This 0 risk to lenders process makes getting approved for a secure credit card almost guaranteed.
Why Do People Use Secured Credit Cards?
Given that you can only borrow against the money you put into your account when using a secured credit card, many wonder what the point of having one is.
After all, if you have $500.00 to put down as a deposit on your card, why wouldn’t you just use that $500.00 rather than borrowing it from yourself through a creditor?
The reason why people use secured credit cards is to build their credit up. Maybe you’re new to credit and can’t get an unsecured card. Maybe you have a poor credit history and need to prove to lenders that you’re responsible.
Whatever the reason may be, utilizing your secured credit card responsibly can be a fast track to improving your credit score and can eventually make it so you qualify for better products.
What are Some Advantages to Secured Credit Cards?
Having a secured credit card provides a couple of advantages to consumers in comparison to similar credit products. Some of those advantages include:
Less Spending Pressure
When you use a secured credit card, you reduce your risk of overspending and becoming delinquent on your payments.
At the end of the day, you can only charge to your card what you have on deposit which means you can never spend in excess of your assets. This gives you a fantastic opportunity to build credit without risk of failure.
Easy Approval Process
Getting approved for secured credit cards is instantaneous. It’s almost impossible to get rejected so long as you meet very low qualifications set forth by lenders (being 18 years of age, having a bank account, etc.).
What Are Some Disadvantages to Secured Credit Cards?
While secured credit cards are easy to get and useful when building credit, these products mostly favor lenders. Here are some disadvantages you should be aware of before applying:
You’re Not Really Borrowing Money
Most people use credit cards because they need to borrow money they don’t have. You can’t do that with a secured credit card.
The only money you can borrow is the amount you’ve deposited as “security” or “collateral”.
You Assume All the Risk
Since lenders never lend you more than what you have deposited with them, they never have to worry about losing money when lending to you. In addition to that, if you don’t pay your credit card balance in full each month, lenders will charge interest on your outstanding credit balance (as is the case with all credit cards).
That means that lenders not only aren’t lending you money but also have the opportunity to make money off of you.
Why Unsecured Credit Cards are Preferable to Secured Credit Cards
Now that you have an answer to “What is a secured card?”, let’s talk about why unsecured credit cards are always the better option for responsible consumers.
Unsecured credit cards allow you the flexibility to borrow the money you need to get through whatever emergency you’re facing. That helpful feature makes the interest you may end up paying on your credit card worth the expense since you’re actually getting a service in return.
This comes in contrast to unsecured credit cards which don’t really provide you any service beyond helping you prove your creditworthiness.
Furthermore, unsecured credit cards often offer perks in the way of cash back and travel rewards. Consequently, people who pay off their balance in full each month could end up paying no interest to lenders and may end up making thousands of dollars per year in cash back by using their card responsibly.
How to Qualify for an Unsecured Credit Card
If you think that your current credit situation makes you ineligible for an unsecured credit card, consider working on improving your credit score before applying.
You can do this by paying down your existing debt on time and by allowing your credit history to age.
You can also find out more about lenders who offer unsecured credit cards to people with below-average credit online.
Wrapping Up
To summarize our article’s core question of, “What is a secured card?”… A secured credit card is a lending product that requires consumers to pay a deposit in order to borrow money.
Consumers cannot borrow money in excess of their deposit amount which makes it so they’re really just borrowing from themselves.
The advantage to using this card type is that it allows people with bad or no credit history to prove their creditworthiness. That could potentially help users qualify for better credit products down the line.
For more information on credit cards and other things finance related, check out new content on Fine-Tuned Finances today!