Monday, June 17, 2013

Secured Cards: An Alternative To Credit Cards

Secured cards are a great alternative to those regular "unsecured" credit cards.
photo credit: Credit Tips via Good Credit Bad Credit cc

Read this if: 

1) You're worried that you might get into financial trouble if you start using a credit card. 
2) You want to start building credit but you don't want to get a credit card because you've heard horror stories about credit card debt. 

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I think we all know that credit card debt is a problem a lot of people have these days. There's something called a "secured credit card" that acts like training wheels for a "real" credit card (aka unsecured card). People use these secured cards to learn how to handle a regular credit card wisely, and sometimes use them to rebuild their credit after they experience semi-eternal financial ruin. It's also easier to get approval for secured cards, especially if you don't have much of a credit history.

What is it?

You know how the "credit" for a credit card comes from the company that you got the card from? Well, for a secured card, the money comes from YOU. You put the money in a bank account as a security deposit, and the amount you put in is used as your line of credit. You (ideally) won't spend more than you have in the account. 

How does it work?

You use the card just like you would a normal credit card, paying the bills in month cycles just like normal. With unsecured cards, if you go over your credit limit, or don't pay bills on time, bad things happen to your credit report and score. With secured cards, bad things still happen to your credit report and score. Just as you would pay bills for an unsecured card with your checking account, you would do the same for charges on your secured card. 

How do I get one?

Check out this site to see some secured credit cards offered by many reputable companies (don't get one from a company you've never heard of!) : http://www.creditcards.com/secured-credit-cards.php 

Depending on which card you get, there may be fees involved. 

What happens to my security deposit while I am using my card?

It stays at the bank, and doesn't get touched unless you miss a payment or go over your credit limit. When you "graduate" to an unsecured card, you get your deposit back. 

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Plan of Action: 

1) Decide if you want to start building credit history. If you do, consider getting a secured card to start out. 

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Questions about secured cards? Let me know in the comments. 

As always, contact me with questions or suggestions! You can either comment directly on the post or send me an email to moneymattersjoan@gmail.com. 

2 comments:

  1. What would you say is the difference between a secured card and a credit card with money deposited to your personal debit account. I feel like its only benefit would be that it is easier to get but had the same problems posed by credit cards once you go over or miss a payment?

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    1. The difference is that you wouldn't go into more debt as a result of "going over" or missing a payment since the money from your initial deposit is used as collateral. I'm not sure what you mean by "a credit card with money deposited to your personal debit account," though.

      P.S. I've been checking with people to see if they get a notification when I respond to their comments, so let me know if Blogger contacts you when I reply.

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