When we talk about credit cards, we often only know them as unsecured. The most common form of secured credit is probably a home equity line of credit (HELOC) where funds are secured to collateral, which in this case is a house. But there are actually much smaller versions of HELOC that lenders do not advertise as aggressively.
Secured credit cards require a security deposit into a savings account. And with the deposits as collateral, the lender can issue a card with a spending limit that is equivalent or slightly more than the amount in the savings account. This is not the same as a debit card. A Debit card makes direct deductions from the account in question. Whereas for secured credit, no direct deductions are made. It serves the basic functions just like a regular credit card. And if payments are not made by the due dates, you will be charged an interest as well.
How does it benefit your credit?
If you had never gotten a credit card due to eligibility or failing to meet the qualification criteria, you will have little problem getting a secured card. It could be that your income does not meet the minimum criteria or that you never wanted one in the first place. You will have few road blocks by going the secured route. There can be many reasons why you will want to build up your credit reputation. Maybe you are getting ready to apply for a jumbo mortgage or a huge personal loan. I don’t know. And because this is a legitimate facility, your timely payments are recorded in your credit report. It is an easy way for someone new to the world of lending to build up the type of reputation that a lender will take into account.
If you have been refused on all your previous applications for facilities due to a damaged credit history, you can choose the secured route as well to reestablish your reputation. You will be able to use this chance to rebuild your creditworthiness all over again. But be mindful that if you are an undischarged bankrupt, you would probably no qualify for anything at all. That is the little drawback of filing for bankruptcy.
If you are one of those individuals who just cannot stop swiping your cards all over the place, a secured card can serve as an automatic debt protection feature that safeguards you from spending over your limits. Sometimes the simple thought of putting your own savings at risk can be the one deterrent that will divert you onto the right track. Because if you are to be a bad paymaster, there will probably be terms in the contract that allows the bank to legitimately seize your deposit to repay themselves.
To meet your original objective of building or rebuilding your credit reputation, you might want to keep only one card so that you do not overspend all over again. Also remember that it is of utmost importance that you repay your bills in full at the end of each accounting period. Not doing so will defeat the purpose of your initial plan. And if you are really unable to make full repayments, at least make the minimum payments before the due dates. The impact of late payments is far more damaging than partial payments. Moreover once, you are late, you could be charge high interest, late fees, administrative fees, etc. Before you know it, the circus is running around you again.
Some people make it a point to meet the requirements of lenders and issuers. Some people attempt to do it but are not meticulously enough to keep track of everything. Then there are those who for one reason or another refuse to pay for what they have spent. Make it a point to be the first type as you have a goal in mind. If you have a certainty that keeping on this track will ultimately lead you to your goal, it will not make sense to not to follow it through.
The good thing is that if you keep at it diligently, you will start to qualify for a proper card very soon as your credit improves. You could be looking at between 6 to 18 months. This is also dependent on the lender you go to as they will have different criteria to review before granting any approvals. As sure sign that your resurrection is taking place is when you start receiving cold calls and mail promoting loans and such. These marketers know their stuff and will most likely have pre-screen your qualifications before spending money on these advertising channels to reach you.