It’s normal to be wary of traditional credit cards. You might be trying to avoid debt or rebuild your credit from the ground up. Fortunately, you have options.
Secured credit cards, for example, can be a smart alternative to the other plastic in your wallet. How do these cards work? Typically when you open a secured credit card, you make a deposit, which becomes your credit limit.
Because this deposit backs your purchases, the credit card company can take this money if you don’t pay your bill. If you always pay your bills on time, however, you’ll get the deposit back when you close the card.
Here’s why this credit model might be the right choice for you:
1. You Can Get Approved More Easily
Companies look at your credit history when you apply for a credit card. That means if you have a poor credit history, or no credit at all, you might not get approved. Secured credit cards have a lower bar for entry. Credit card companies routinely issue secured cards to individuals with poor or no credit. In some cases, the company won’t even check your credit score.
If you hope to use a traditional credit card later on, a secured card will help you get your foot in the door. Some credit issuers will offer a non-secured card to card holders who pay their bills consistently. If your current issuer doesn’t offer an upgrade, you can close your secured card and get your original deposit back.
2. You Can Build (or Rebuild) Your Credit
A secured credit card can be a great option for individuals who need to build or rebuild their credit. If you’re new to the credit world, this card jumpstarts your credit without the risk of a typical card. You can make a few small purchases a month and pay off the balance in full.
Secured credit cards can also be useful credit rebuilders. If you weren’t able to manage a large line of credit in the past, your score might be hurting. A secured credit card can put some healthy limits in place while you work to bump your score up again. You’ll make payments each month to build your credit, while avoiding the temptation of an unmanageable credit limit.
Keep in mind that issuers report secured cards to credit bureaus. This differentiates secured credit cards from prepaid cards. So it’s important to opt for a secured card when seeking to build your credit. Prepaid cards are more like debit cards.
3. You Can Learn About Credit
Applying for your first credit card can be daunting if you aren’t financially savvy. If you’re still learning the ropes in personal finance, you might consider a secured credit card. This way, you can get in the habit of making payments and checking your credit without all the frills.
When opening your card, you can establish a credit limit that you’re comfortable with. You’ll set this limit with the amount of your deposit. As a finance newbie, you might start with a smaller limit and go up from there.
4. You Can Watch Your Credit Utilization
Credit utilization — the ratio between the credit you’re using and all your available credit — is one factor in your credit score. Ideally, you want to keep your credit utilization ratio below 30%. But this isn’t always easy, especially if your credit limit is on the lower end. That’s likely to be the case with a secured card, as your limit is the amount of your deposit.
Fortunately, there are ways you can manage your utilization with a secured card. The first is to pay your balance in full each month — here’s where that small credit limit can help you. You can also pay your bill in increments a few times per month. This will keep your utilization low, and your credit report will reflect that. This is another way that a secured card helps build a positive credit history.
5. You Can Practice Budgeting
Budgeting is another essential part of personal finance. But if you’re inexperienced at cutting costs, a secured credit card may help you stay organized. Consider using your secured credit card to cover specific monthly bills. Then pay the card off every month.
One effective way to build your credit while you budget is to use your secured card for repeat expenses like subscriptions or utilities. Automate your payments and pay the full amount off before the billing cycle ends. And for your variable expenses? Consider using a debit card. This will prevent you from using your secured card to purchase items you can’t afford.
6. You May Be Able to Avoid an APR
The annual percentage rate is the interest rate on your credit card. Loans also have APRs, and these rates may also include other types of fees. The APR is often what causes trouble for credit card holders. If you carry a balance on your card, the card issuer charges interest. And this interest increases your balance, making it increasingly difficult to pay off.
Some secured credit cards don’t have an APR. However, you need to seek these cards out. Many secured credit cards have a higher interest rate than traditional credit cards. While this might incentivize card holders to pay their balance each month, opening a card without an APR may offer peace of mind.
7. You May Be Able to Avoid Fees
Just as some secured credit cards lack an APR, these cards may also forgo typical fees. Requirements like annual and late fees may be common, but they can also be a financial burden. Again, it’s important to note that many secured credit cards still carry fees. But some don’t, so you’ll want to ferret them out.
Be sure to do your research before opening a card. Selecting an option that has low or no fees can help you focus on boosting your financial position.
8. You Can Shop Like Normal
Secured credit cards may have some special parameters. However, you can still use your card as you would a traditional credit card. Vendors will accept your secured card as long as they accept the brand it’s associated with. So if you have a secured Visa card, and the store accepts Visa, you’re good to go.
One of the main perks of a secured credit card is that you can make purchases like normal while building your credit. If you pay the balance each month and keep your credit utilization in mind, your card can be a tool for mindful spending.
Whether you’re rebuilding your credit or improving your financial literacy, a secured credit card can be a great tool. Just be sure to do your research and select a card that meets your needs. With this card in hand, you can start to build your credit and meet your financial goals.
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