There are two main types of credit cards. One is the unsecured type, which is what the majority of those issued by banks are. It is provided without requiring a material guarantee that payments will be made by the cardholder. The other is the secured type, which calls for some sort of insurance that the bank will recover its money, thereby minimizing risk. Creditors are increasingly becoming conscious of their clients’ ability to pay in the aftermath of the credit crisis. For people who are struggling with bad credit ratings, getting a secured credit card is a way of rebuilding their stature in the eyes of lending institutions.
Secured credit cards are guaranteed by money deposited in a bank account, the amount depending on the contract. This makes creditors more likely to issue the cards to anyone who can meet this minimum requirement, even those with bad credit ratings who are usually turned away otherwise. It functions much the same way as unsecured credit cards with the payment history being monitored as well. This enables conscientious cardholders to earn high credit ratings which would enable them to apply for loans at low interest. People seeking to improve credit score often resort to this method with apparent success.
How to Pick the Best Secured Credit Card
Some might be wondering whether the unsecured type of credit card is just another way of referring to the debit card. This is not so. Although both cards are easy to obtain and come with a risk-mitigating factor, only the first has usage recording that reflects financial behavior. The frequency of this monitoring should be inquired into, with the rule of thumb being a 30-day cycle.
Additional Factors
1. Deposit protection – Whatever happens to banks, their clients should be assured of recovering a certain amount through insurance. Try to discover the exact amount and see whether the institution is insured by the FDIC.
2. Interest earnings – As the deposit will likely sit in a bank account for a while, check its interest earnings potential. It may not be much but it can be significant in the long run.
3. Qualification period – The length of time before an application for an unsecured card is approved. Most will implement a 9-month observation period before allowing a switch from secured to unsecured cards.
4. Charges – Beware of hidden fees and charges. Some of these are one-time penalties while others are recurring. Be sure to study the contract carefully, reading all fine prints to avoid surprises later on. Make payments on time to prevent excessive fees.
5. Maintaining balance – Banks will enforce a minimum balance on the deposit account. How much the card can purchase may depend on the current balance. Find out what happens if this dips below a certain level in terms of charges, credit line, and other consequences.