Secured credit cards are a boon to credit card holders in many ways. If you already have a good credit score and are eligible to get credit cards issued as you wish, then you have nothing to worry. But not everyone enjoys a good credit score.
There are instances where the credit score is too poor to be eligible for a regular credit card. Also sometimes credit card users need to build their credit scores quickly in order to get a regular credit card issued. In all these situations, secured credit cards can double up as a very handy tool.
How do secured credit cards work?
Well, secured credit cards work just like any other secured loan. For example, when you apply for a loan from a bank, they always scrutinize your application to see what kind of asset you could provide as collateral or security. The worth of the collateral or security that you can provide will often determine the amount of loan that the bank will ultimately extend to you. This is just a strategy adopted by the bank to minimize the risk on the loan amount. In the event that you fail to pay back the loan amount and its interest, the bank always has your collateral to sell and can still get the money back.
Secured credit cards also work in a similar manner. When a bank or credit card company does not find your credit score to be as reliable as they would like it to be, they prefer minimizing the risk on the credit by asking for a security (collateral). This security is usually in the form of a bank account with a fixed deposit. It goes without saying that the amount of money in the fixed deposit is directly going to influence the credit limit provided by the secured credit cards issued against it.
Facts to know before applying for secured credit cards
There are certain criteria to be met before your application for secured credit cards gets approved. If you have filed for bankruptcy in the recent past, you will not be eligible for getting a secure credit card.
Just because you have poor credit score and there are no other options for you except using secured credit cards does not mean that you should agree to pay sky high interest rates for using them. There are many options within the category of secure cards as well, and you just need to compare them in detail to get a good deal.
The best use of secured credit cards is as tools to build your credit score. Making timely payments on the credit card bills and not using more than 20% of the credit limit available on the cards is the best way to get maximum advantage from them.
As the proverb goes, there is a silver lining to every cloud. Even if you are restricted to using secured credit cards because of your poor credit score, you can always look at the brighter side and use them to build a good credit score by making timely payments.
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