Secured credit cards offer many benefits for people who are looking to build or boost their credit score. Unlike an unsecured card, this one is funded by you. You typically make a deposit when you open the card, and that amount determines your spending limit.
As you get older, it’s likely that you’ll need a loan for larger purchases, like a house. However, sometimes people discover too late, they don’t have the credit score they need. It’s better to plan ahead and work on your score now. If you’re trying to improve your credit score, a secured card might be the way to do it.
Here are six ways secured cards make it easier for you to build credit.
1. Secured Credit Cards Don’t Require Perfect Credit
Credit cards are a well-known way to improve your score. But while many people want to tackle their less than stellar credit, they shy away from the challenge. This is often because it can be difficult to get approved for unsecured cards. That’s especially true of cards with the best perks and benefits, which generally require an excellent score.
When people are met by roadblocks to getting a credit card, like low credit scores, they’re less inclined to keep trying. That’s a shame — and completely unnecessary. No one should feel like they can’t improve their score.
Fortunately, you don’t need to have a perfect credit score to get a secured credit card like Chime. You just need enough money to fund it. You’re essentially spending your own money — you’ll just be building credit at the same time. It’s a win-win.
2. Spending Sprees Have Fewer Consequences
When you use an unsecured card, you could end up making a couple of mistakes that really ding your score. For one, you may exceed your actual limit. Then there’s the mistake that may be more obvious: You can rack up more debt than you can pay down. Both of these can negatively impact your credit score and peace of mind.
A secured card isn’t a perfect solution, but it’s a pretty darn good one. You can still end up with a high credit utilization ratio — another important credit score factor — if you’re not careful. However, you don’t have to worry about spending more than you can afford.
Once you load a specific amount onto the card, your spending limit is set. You’re only using the money you have. A lender doesn’t factor into the equation, so you can’t be saddled with loads of debt.
3. Your Activity Gets Reported to Credit Bureaus
You may be reading this and wondering how a secured card is any different from a prepaid debit one. While they function similarly, a secured card reports to credit bureaus. This is a big advantage if you’re trying to build credit.
Unsecured credit cards also report to credit bureaus, but they can report more problems than a secured card. You have to watch that pesky credit utilization ratio for both. However, burgeoning debt is only possible with an unsecured card. A secured card gets you the reports you need to build a credit history, with fewer possibilities for failure.
4. Your Bill Will Never Be Sent to Collections
Most secured credit cards require you to make a security deposit before you get approved. The deposit lowers financial risk for the issuer and creates security for the cardholder. You’ll never have to deal with collections because the deposit is equal to your credit limit.
If you end up defaulting on payments, you won’t have to worry about debt collectors badgering you for missed payments. The issuer can simply use your deposit to pay off the balance. Late payments will still hurt your score, but at least your debt won’t increase.
5. Some Secured Cards Don’t Charge Interest
The upshot of secured cards is that they build credit as well as unsecured cards. Plus, those secured don’t pose the risk of significant debt. Maxing out your card is possible in either case, but you won’t face ballooning payments with your secured card. But what about interest?
Unsecured cards often have hefty interest rates. If you have a high balance on your card, you might struggle to pay it off. Accumulating interest charges will make that number skyrocket.
The good news is that some secured cards don’t charge interest. With these cards, instead of paying an initial deposit, you transfer money from a spending account and “charge” purchases with those funds. Since you’re spending your own money and paying as you go, you can avoid interest charges altogether.
6. You Won’t Spend Money You Don’t Have
Hopefully, you’ve got this one down by now, but it’s worth reiterating just in case. Secured cards are a great option for building or rebuilding credit because you only spend what you have.
Unsecured card issuers sometimes hand out high limits like they’re a perk. While this might seem great at first, a high limit can cause major problems if you overspend. If you can’t pay down your balance, what you owe will grow. You may face payments that you just can’t make.
This won’t happen if you have a secured card. It’s a way for you to build credit without spending money that isn’t yours. You decide what your limit is going to be when you put down a deposit or transfer funds from checking. Then you can focus on keeping your credit utilization ratio low and watching your score climb.
Many people who are trying to build their credit don’t even realize that secured cards are an option. Building credit or credit history can be tricky. But a secured card is a good strategy to set people on the right track to getting the score they need.
In this day and age, it’s hard to make big purchases in life without solid credit. Luckily, loans with good rates aren’t as difficult to come by if you use the tools at your disposal. A secured card can be one of these tools. No matter what your financial situation looks like, a secured card is an excellent option for building credit.