The
following are answers to common questions about secured
cards and secured card benefits:
What
is a secured credit card?
Not to be confused with a debit
or check card, it is an actual credit card account
issued by a lending institution that is opened with
a deposit into a savings account, money market account,
or certificate of deposit. The amount of deposit into
this required savings account varies from card to
card, but generally minimum amounts range from $250
- $500 and may be secured up to $10,000. The funds
you deposit are considered 'collateral', and will
even earn a little interest since they are being held
in a true savings account.
What
will my credit limit be, and what fees will I have
to pay?
The credit limit you will have
is determined by the amount you deposit into the initial
savings account. Sometimes the limit will be for the
full amount of the deposit; other times it will be
a percentage of the total. Other fees that may be
attached to your account are application fees, annual
fees, and processing fees. It is important to note
that all companies do not charge all of these fees.
Always read the terms and conditions of the credit
card to determine how much you will have to pay in
fees before you apply.
What
are the benefits to my credit score with a secured
credit card?
If your credit history is severely
damaged, a secured credit card can be used as a great
tool to re-establish your creditworthiness. If you
have no credit at all, a secured credit card is a
great tool to use to establish a credit history.
Can
my credit limit be extended beyond the savings deposit
amount? Preset
limits cannot be exceeded in the beginning. After
several months as you establish good repayment habits,
you may qualify for an increased credit limit. In
many cases, you may qualify for an unsecured credit
card after establishing creditworthiness with timely
payments for 12 more consecutive months.
Can
I use my secured card to rental car or book a hotel?
Yes!
Secured credit cards are very useful for transactions
like these that require a true credit card and not
a debit card. Many hotels and car rental companies
will not accept a debit or check card to make reservations,
even if you intend to pay cash in full upon the completion
of your trip or stay. A secured card can be very handy
in this situation as you will be able to complete
these kinds of transactions.
Should
I make payments or repay the whole balance every month?
If you never carry a balance
because you pay the card off in full each month, you
are not demonstrating the ability to handle credit,
which is what unsecured credit card companies are
looking for. Timely payments are what counts toward
achieving a good credit score. You should also be
aware that frequently charging to the limit on your
card can hurt you. It makes you look too dependent
on it. The best way to establish a good repayment
history is to charge something every so often and
take a month or two to pay it back. This is a very
reasonable approach to building a credit history with
your secured card.
What
happens if I do not make a payment on time?
It is important to keep in mind
that a secured card is a credit card, not a debit
card. Because of this, if full payments are not made
each month, then interest is charged on the outstanding
balance. The lending institution uses the security
money to pay off the debt only as a last resort. Even
though the card is secured, it is still possible to
damage your credit. If you just use it wisely, you
will be rewarded.
Will
my payment history get reported to the credit bureaus?
Most secured credit card companies
report your payment history to the credit bureaus
on a regular basis, but there are some that do not.
If your goal is to build or rebuild your credit score,
make sure you utilize a company that reports your
payment history to the credit bureaus. The report
of timely payments is what helps you to increase your
credit score. To use secured credit cards as useful
tools in proving creditworthiness is simple:
#1
- Use your card in moderation.
#2 - Carry a balance less than 60%
of your limit.
#3 - Make consecutive timely payments.
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