The concept behind secured credit cards is relatively simple though many people are unaware of what exactly a “secured” credit card means. The more popular type of credit card is an unsecured credit card which is generally just known as a credit card. Unsecured credit cards offer individuals a credit card limit of a particular amount, usually based loosely on their income level, profession and the credit history.
How does a Secured Credit Card Work?
Secured credit cards work based off of some collateral. This means that the individual would need to deposit something in order to use the secured credit card. The limit on a secured credit card would be exactly what you deposited or just slightly higher. This eliminates the risk of spending beyond your means.
Many people argue that the state of the economy and the rise of debt and debt related troubles is highly due to unsecured credit card companies offering high credit limits at low interest rates to individuals who are likely unable to pay because of the current economic recession. Others argue that this is not entirely the credit card company’s fault as many individuals simply lack the self discipline to spend within their means and not more.
However, with job security at an all time low and with individuals getting laid off at alarming rates, it’s not always easy to plan for what is or what isn’t within one’s means. One day you may be able to afford to pay off your credit cards with no problem and just one unexpected layoff notice can change that in a matter of weeks. You may quickly find yourself unable to afford the things you once had no problem at all paying for.
This is where unsecured credit cards can become a big issue. Because they allow you to spend money you do not have with the understanding that you will one day have the money, you can often find yourself spending paychecks far before you deposit them in your bank account.
To avoid these pitfalls, many have started to turn to secured credit cards in hopes of a more secure financial future.
Finding a Secured Credit Card
Companies like Capital One, Wells Fargo and Orchard Bank offer secured credit cards. Look for the lowest interest rates possible and for secured credit cards without annual fees. Keep in mind that all of these companies have different terms and agreements related to their cards. Make sure you read the fine print and know exactly what is expected of you when you enter the agreement.
Benefits of a Secured Credit Card
Unlike a prepaid card, a secured credit card can in fact help you rebuild your credit. This can be a major benefit to anyone who has previously had credit trouble and is looking for a way to get back on their feet and increase their credit score. Secured credit cards will allow you to stay in the credit card game with less risk while rebuilding your credit score.