Why are Secured Credit Cards Beneficial?

Secured credit cards are the credit card of choice for rebuilding a bad credit score by credit repair consultants.  One big reason is that when the banks look at your credit report, a secured credit card looks the same as an unsecured credit card.  When rebuilding their clients’ credit, they will offer a secured credit card to their client over an unsecured bad credit credit card for that reason and several more!  Below we discuss the reasons why!

How do Secured Credit Cards Work?

As their names imply, these credit cards require a security deposit. This feature serves three important purposes.

First, Often times these credit cards are considered “guaranteed approval”  Since the bank requires a security deposit.  It allows the bank to feel secure in granting the credit card since your credit limit will equal your security deposit.  If you fall behind or stop making payments the credit card issuer will simply use your deposit to pay what is owed.

Second,  your spending limit will equal your security deposit.  This can be VERY helpful in rebuilding credit.  Many unsecured bad credit credit cards will only give credit limits of $200-$500.  This is a good start for rebuilding your credit.  But you can do better with a secured credit card!

Third, There is something called “comparable credit”.  Comparable credit is what a bank looks at when you are asking for a loan. Let’s say you want a loan of $10,000.   They will look at your highest line of credit and analyze the payment history.  So if your highest line of credit is a $300 card.  That’s a big leap.  But if you have a secured credit card with a credit limit of $2000.00 and above.  Its a lot easier to get approved.

So if you plan on buying a car in the next 2 – 3 years.   You will have a better chance of getting approved for a LARGER LOAN AMOUNT.  If you have been using a secured credit card with a large credit limit.

Of course, you also have to save up the money for the deposit.  But here is how a secured credit card can help you again.  You put the money you are saving towards your new car on the secured credit card.  Many of them allow you to add more money periodically to your account so you can increase not only your credit limit but your savings!  Generally in 2 – 3 years, your secured credit card will become unsecured.  Meaning the bank will SEND YOU BACK YOUR SECURITY DEPOSIT.  Then you can put that down as your down payment for a car.

So let’s go over that one more time so you know how it can work for you.

1. You open a secured credit card with a large security deposit.  Over $2000 is preferred
2. You use the card and show a solid payment history.
3. You keep adding to the card and growing your credit limit.  The more expensive a car you want, the bigger you should grow your credit limit so you have comparable credit.
4. In 2 -3 years of on timely payments the bank makes your card unsecured and you take your returned security deposit and put it down as a down payment for your NEW CAR!.

How to Benefit from Secured Credit Cards

When you are attempting to rebuild your credit, whether its with a secured credit card or an unsecured one.  You need to train yourself to use good credit habits.

1.  Use your credit card responsibly.  You want to show the lenders you are able to pay and pay on time.  So you want to use the credit card, but keep in mind at the end of the month, your goal should be to pay it off in full.
2. Set up automatic payments.  Some clients set it up to only pay the minimum amount due.  And then they send more money as they can.  Always pay on time.
3. Banks don’t like it if you have maxed out your credit cards. You should try not to use more than 30% of your available credit.

Secured credit cards are a GREAT way to rebuild your credit.  It not only allows you to build credit, build comparable credit and help you build a savings account that you can later use as a down payment for a car or just roll it over into another savings account!

NEED A SECURED CREDIT CARD?  CLICK HERE

Updated 09/2/16 By Liz Roberts