Published December 02, 2013
Dear Opening Credits,
Why do you like secured credit cards so much? You always say to get them, but they are worse for your credit than regular cards. Tell the truth.
It's true, I am a swooning fan of secured credit cards! They are most certainly not bad for your credit rating. I'm not sure where you got that idea, but if you look at how they work and what their advantages are, I think you'll come to love them as I do. Sure there are drawbacks -- and I'll cover them -- but the fact is, they're a fantastic little banking invention.
Secured credit cards are just like unsecured credit cards, only they're collateralized by cash. Upon acceptance, the cardholder puts a fixed amount of money into a special savings account. Typically, the issuer sets the charging limit to that sum, but it can sometimes be higher. The issuer won't touch the deposit unless the cardholder runs up a balance and fails to pay it back. In that case, the cardholder would be in default, giving the issuer the right to claim what's legally due them.
Can you see the positive elements to this arrangement yet? If not, here's four clear ways secured cards can help people -- maybe even you.
So tell me: How these secured accounts are bad for credit? The only way I can think of is that (like any credit account), you can mismanage it. However, that wouldn't be the card or the issuer's fault, but the cardholder's.
As for the promised downsides, some secured cards do have annual fees that are on the high side, and the interest rates tend to be worse than those for their unsecured cousins. But show that you can charge like a pro with one and you can close it out, withdraw your deposit, then shop for the plastic that you like better.
Come on, admit it, you're warming up to the idea of secured credit cards too now, aren't you?