Credit Rebuilding: Secured credit cards
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By Bromwich+Smith Staff | 1466 words | Reading Time: 7 minutes | Last update 2024/02/29
Rebuilding credit is a challenge when you are recovering from overwhelming debt. Responsible credit usage is one way to positively impact your credit score, and while there are several approaches available, today we want to talk about secured credit cards. Unlike other credit cards, secured credit cards require a cash deposit as collateral, making them accessible to individuals with limited or unfavourable credit score. By using a secured credit card responsibly, you can gradually improve your creditworthiness.
What is a Secured Credit Card?
Before jumping in, it’s important to understand the fundamentals of a secured credit card. Unlike a typical credit card (which is a form of unsecured debt) a secured card will require a deposit. This refundable amount will vary, equal to your desired credit limit. This means that if you would like a $5,000 limit you first need to put down $5,000. This deposit will be collateral and protects the card issuer if you fail to make payments. It's important to note that a secured credit card works like any other credit card, and timely payments are reported to credit bureaus, influencing your credit score positively. Failure to make payments when they’re due will result in the creditor taking payment through the deposit, a negative impact to your credit score and the potential of the debt being sent to collections.
Pros and Cons to a Secured Credit Card
Pros:
* Lower interest rates as the lender has collateral
*Easier approval for those with a lower credit score or limited credit history
*Higher loan amounts available
Cons:
* Risk of losing the deposit if you fail to make payments
Choose a Reputable Secured Credit Card
Research and select a reputable secured credit card that suits your needs. Look for a card with low fees, a reasonable interest rate, and a history of reporting to major credit bureaus. Compare different options, considering factors like minimum deposit requirements and credit limit increases over time. Read reviews before committing. There are many cards currently available, and they are not all the same. We suggest doing your research, and speaking to a financial expert to learn about what card might be right for you.
Start with a Low Credit Limit
When acquiring a secured credit card, begin with a lower, more manageable credit limit based on your financial situation. A lower credit limit will be easier to manage, reducing the risk of overspending and missing payments. Aim for a limit that allows you to make regular purchases without exceeding 30% of your available credit. If you find that you require a larger limit, you can increase your limit as you have shown that you have managed to pay off the current balance. A low credit limit allows you to avoid overspending and falling into pitfalls that will counterbalance the great work you have done in reducing your overwhelming debt.
Make your payments
Paying your secured credit card balance on the due date is essential. Late or missed payments can have a negative effect on your credit score. Set a budget, put notifications and reminders into your phone or calendars, set up automatic payments, or anything else you find helpful to ensure that you meet your payment obligations. Paying your balance in full each month is ideal, but if that's not possible, strive to make at least the minimum payment on time. Consistency in meeting payment deadlines demonstrates financial responsibility and improves your creditworthiness.
Keep Credit Utilization Low
Credit utilization refers to the percentage of available credit that you are using. Aim to keep your credit utilization below 30% of your limit by managing your expenses. If you have a limit of $1,000 and aren’t able to make your full payment, don’t carry more than $300 over to the next month. Regularly monitoring your credit card balance and making multiple payments throughout the month could help keep the payment down.
Unsecured Credit
Unlike secured credit, you will not be required to provide a downpayment or other collateral to qualify. Instead, this will be based on your creditworthiness, income and credit history. Unsecured credit is typically credit cards, student or personal loans.
Pros:
* There is no collateral risk as there has been no collateral guaranteed for the loan.
* Loan flexibility on how you choose to spend the money
* Helps build your credit history.
Cons:
* Higher interest rates
* Lower loan amounts
* Strict approval policies which may make it difficult for those with lower credit scores.
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How to decide between Secured and Unsecured Credit
When it comes to determining if secured or unsecured credit is better for your situation you will need to review your current financial situation, credit history and the purpose of the loan. Borrowers who have a lower risk tolerance or do not want to put up collateral for the loan will prefer unsecured credit. Consider the interest rates associated with both types of credit to determine which will match your budget and financial goals. Take into account what you are going to use the loan for. For example, a mortgage is widely recognized as secured credit due to the high amount of the loan and the collateral of the house or property being purchased.
Graduating to an Unsecured Credit Card
For many, the goal is to graduate to an unsecured credit card once you have demonstrated responsible credit card usage, which can happen over time. Some secured credit card issuers offer the option to advance to an unsecured card, while others may require you to apply for a new card. You may not have the option with your current card and may need to explore other unsecured card options. Keep in mind that unsecured credit cards typically have higher credit limits and more favorable terms. When transitioning to an unsecured card, ensure you continue practicing responsible credit behavior to maintain and further improve your credit score.
Unsecured credit can be a powerful tool to rebuild your credit, and an option that can be worth exploring. Ensure that you do your research before committing to a vendor as the goal is to work towards a better financial situation. If you are finding yourself carrying credit card debt, consider reaching out to a Licensed Insolvency Trustee like Bromwich+Smith to learn about your debt relief options.
Remember, reaching out for help is a positive step towards managing your credit card debt effectively and regaining control of your financial situation. Bromwich+Smith has a number of debt relief approaches to help get your life back on track. Reach out today for a free, confidential, non judgemental consultation to see if you qualify for debt relief programs. Bromwich+Smith’s Debt Relief Specialists are available by phone at 1.855.884.9243, or request a call back at contact us page.
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FAQs:
1. What is a secured credit card?
A secured credit card requires a cash deposit as collateral equal to the desired credit limit. It functions like a regular credit card, with timely payments positively impacting your credit score.
2. What are the pros and cons of using a secured credit card?
Pros include lower interest rates, easier approval for lower credit scores, and higher loan amounts. Cons involve the risk of losing the deposit if payments are not made.
3. How should I choose a reputable secured credit card?
Research and select a secured credit card with low fees, reasonable interest rates, and a history of reporting to major credit bureaus. Read reviews, consider deposit requirements, and credit limit increases.
4. How can I graduate from a secured to an unsecured credit card?
Demonstrate responsible credit card usage over time. Some issuers offer an upgrade, while others may require applying for a new unsecured card with higher limits and more favorable terms.
5. What is the difference between secured and unsecured credit?
Secured credit requires a deposit as collateral, while unsecured credit relies on creditworthiness. Secured cards are easier to obtain but may have lower limits, while unsecured cards have higher limits but stricter approval policies.
6. How can I start with a secured credit card to rebuild my credit?
Begin with a lower credit limit based on your financial situation. Aim for a limit that allows regular purchases without exceeding 30% of the available credit. Increase the limit gradually as you demonstrate responsible payment behavior.
7. What is credit utilization, and how does it affect my credit score?
Credit utilization is the percentage of available credit you are using. Aim to keep it below 30% by managing expenses. Regularly monitor your credit card balance and make multiple payments throughout the month to keep utilization low.
8. How do I decide between secured and unsecured credit?
Review your financial situation, credit history, and purpose of the loan. If you have a lower risk tolerance and don't want to provide collateral, unsecured credit may be preferable. Consider interest rates and the intended use of the loan.
9. What are the benefits and drawbacks of unsecured credit?
Pros include no collateral risk, loan flexibility, and credit history building. Drawbacks involve higher interest rates, lower loan amounts, and stricter approval policies for those with lower credit scores.