Learn about why interest rates are high with a Secured Credit Card.
Credit cards are a way to borrow money from a lender or bank. There are two types of credit cards, a secured and traditional ones. Secured credit cards are mainly used to build credit but are considered a higher risk to the bank, resulting in high interest rates.
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Secured vs. Traditional Credit Cards
In order to get a secured credit card, you are required to deposit cash. This deposit helps to ensure that you can repay the amount borrowed. Unsecured credit cards require no deposit. Without the requirement of a deposit, a traditional, unsecured credit card relies on the borrower’s ability to repay the credit card with the use of a collateral.
In the case of a secured credit card, issuers are able to take money from the borrower’s deposit to pay off charges. This is the reason why credit scores are not as important as it would be with a traditional credit card.
Advantages and Disadvantages of Secured Credit Cards
Secured credit cards give users a chance to build their credit if they have a bad or limited credit score. This is ideal for those who cannot quality for traditional credit card. Not only are the requirements lower, but borrowers are given a chance to raise their credit scores with the use of a secured card.
On the other hand, secured credit cards have relatively low limits. Borrowers are required to put a deposit and are limited to that amount. In addition, the interest rates may not as low as the best credit card interest rates given to a borrower with good credit scores.
Using a Secure Credit Card
A secured credit card is not suitable for everyone. However, if you’re one of the following then you should consider getting a one:
- You’re an applicant with a limited credit history, such as a student
- You have a low credit score
- You have trouble getting your own unsecured credit card
It is important to understand all of the features and benefits before you sign up for a secured credit card.
- All of the credit card rates and fees, including annual fees, sign-up fees, and interest charges
- Whether or not the card reports to the credit bureaus
- How large of a deposit you must make, and what your associated credit line will be
- How long until you’ll have the opportunity to get an unsecured credit card
If you are looking to open a credit card soon, it is important to understand the difference between secured and traditional credit cards. There are advantages and disadvantages to everything so understand all aspects before signing up for one!
For more information on banking, check out more bank guides right here on HMB!