The main disadvantages of secured credit cards are the initial deposit requirement and the fact that the credit line is usually limited to the deposit amount. While secured credit cards can be great for people trying to improve their credit score, they typically do not provide any added spending power. There are some other drawbacks to consider as well.
Disadvantages of Secured Credit Cards
You must pay a security deposit. Secured credit cards require an initial deposit, which serves as a form of insurance for the card’s issuer. You will forfeit access to that money until the account is closed or it graduates to an unsecured version.
Secured credit cards don’t provide added spending power. With nearly all secured credit cards, the credit limit will match your security deposit. As a result, you can’t actually borrow any money.
Approval is not guaranteed. Secured credit cards generally offer higher approval odds than unsecured cards. But there are still underwriting standards that every applicant must meet. At the very least, you must be 18+ years old and have enough income to afford both the security deposit and minimum monthly payments. Some secured credit cards might also reject you if have an unresolved bankruptcy.
Some secured cards charge membership fees. Some secured credit cards come with annual fees, which are non-refundable, unlike the security deposit.
Many secured cards don’t offer rewards. With some notable exceptions, most secured credit cards don’t give rewards on purchases.
That being said, secured credit cards can be a great credit-building tool because they offer better approval odds than unsecured cards for bad or limited credit, and report to the credit bureaus the same way. If used responsibly, a secured credit card can add a consistent stream of positive information to your credit reports.
Secured credit cards have both pros and cons, just like any other type of credit card, but the advantages of secured cards ultimately outweigh the disadvantages. Most importantly, secured credit cards are inexpensive, easy to get, and capable of helping you improve your credit score
High approval odds, even with limited or bad credit
Approval is not guaranteed
Monthly reporting to 1-3 major credit bureaus
$200+ security deposit is required
Lower fees than unsecured cards for bad credit
Credit limit usually equals the deposit amount
Hard to overspend
Rewards are rare
Deposit is fully refundable
No access to the deposit while the account is open
Chance to graduate to an unsecured card with consistently on-time payments
Upgrades are not guaranteed
One of the biggest pros of secured credit cards is that they’re available to customers with poor or limited credit. Secured cards also report account activity to the major credit bureaus just like unsecured cards do. This means cardholders can begin to rebuild or establish credit by using the card responsibly. In addition, secured cards usually have lower fees than unsecured credit cards for people with less-than-good credit.
Among the biggest cons of secured credit cards is the fact that cardholders need $200+ to spare for a refundable security deposit. These funds usually don’t accrue interest while securing the account, either. Plus, your credit limit equals the amount of your refundable deposit, so you won’t be able to borrow money for expenses you cannot already afford.
It’s also worth noting that secured card approval is not guaranteed, although the odds are far higher than with an unsecured card.
Bottom Line: Is a Secured Credit Card Worth it?
Yes, a secured credit card is worth it if your objective is to establish or rebuild credit and you make timely payments every month. When used responsibly, secured credit cards have far more pros than cons.
After all, it’s better to place a refundable deposit that you’ll get back upon closing your account with a $0 balance than it is to pay expensive, non-refundable fees. Such fees are all too common among unsecured credit cards for bad credit in particular. Secured and unsecured cards also appear no different on credit reports.
If you’re looking for long-term financing or an abundance of rewards, however, a secured credit card may not be for you. But it might be a necessary stepping stone for you to get the credit card you really want.
Just remember that even though secured cards are the easiest credit cards to get, you’ll still need some kind of income to be approved. A major negative on your credit report such as non-discharged bankruptcy may also prevent you from qualifying.
The biggest benefits of a secured credit card are low fees and the opportunity to rebuild your credit no matter how bad it might be. The best secured cards have no annual fee and will accept people with credit scores in the 300-640 range, along with applicants who have no credit score at all. Secured cards also report account information to 1-3 of the major credit bureaus on a monthly basis and appear no different on credit reports than unsecured cards.… read full answer
There are plenty of other secured card benefits, too, including some that might initially seem like drawbacks. For example, having to place a security deposit is not ideal. Neither is being unable to spend more than the amount of that deposit before making a payment. But those two secured credit card features do benefit cardholders by allowing for lower fees and interest rates and by making it impossible to spend more than you can afford to repay. Plus, a secured card’s deposit is fully refundable when you close the account and bring the balance to zero.
With that being said, let’s go through all the major perks and advantages of having a secured card in more detail.
10 Benefits of Secured Credit Cards:
Credit building potential: If you use your card responsibly, you can establish good credit or rebuild your credit standing after past troubles. Secured cards report to the credit bureaus just like unsecured cards do.
Easier approval: Secured credit cards are available to people with bad credit or no credit history. Some secured cards don’t even check applicants’ credit history.
Low/no annual fees: Secured cards have fairly low fees because the refundable security deposit they require helps the issuer avoid losing money. Many of the best secured credit cards even have $0 annual fees.
Credit card-only transactions: You can use a secured card in situations where other payment methods (e.g. cash) may be limited. For example, if you’re planning to book a hotel or rent a car, you will need a credit card to secure the reservation.
$0 fraud liability: No major credit card issuer will hold you liable for fraudulent purchases on your account. That’s true with all credit cards, not just secured cards.
Car rental insurance: All Mastercard, Visa and Amex credit cards should cover you for theft and physical damage when your charge the car rental to your card.
Roadside assistance: Many secured cards give cardholders access to a free 24-hour phone line that dispatches help with jump starts, towing, gas, tire changes and more. Just the dispatch is free, though. Repair charges from the service provider automatically get billed to your card.
Cell phone insurance: Available with select secured cards, this insurance covers your cell phone up to $600 for loss or damage. You must pay your cell phone bill with a secured card that offers the benefit.
Interest-bearing deposit (rarely): Most secured cards don’t pay interest on your deposit money. But with certain secured cards, security deposits from $300 to $5,000 can earn up to 0.10% APY.
One last benefit of a secured card comes only through responsible use. That means paying the bill on time, preferably in full, every month and staying well within your credit limit. This behavior will help you build a good credit score and eventually qualify for an unsecured card with no deposit, a higher credit limit, better benefits and more favorable terms.
Despite all the advantages of a secured card, there are some drawbacks. For example, you won’t have access to the cash you deposit until you close the account and pay the balance in full. Plus, if you have a pending bankruptcy or tax lien on your credit report, there’s no guarantee you’ll even be approved.
Yes, applying for a secured card does count as a hard inquiry most of the time. Nearly all secured credit cards will do a hard inquiry into applicants' credit reports to assess their creditworthiness, but there are exceptions such as the OpenSky® Secured Visa® Credit Card and the Applied Bank® Secured Visa® Gold Preferred® Credit Card. These secured credit cards with no credit check will not do a hard pull on your credit when you apply.… read full answer
A hard inquiry, also known as a hard pull, will likely drop your credit score by a few points temporarily. But if you haven’t had any hard pulls conducted on your credit report over the past six months and you don’t plan on applying for a sizable loan in the next few months, this shouldn’t be a problem. Your credit score should rebound from a hard inquiry within a few months.
Also, remember that even though your credit score may drop after you apply, responsible use of a secured card will ultimately help your score much more than the inquiry will hurt it. The hard pull will likely be worth it, in other words, especially since secured cards tend to be pretty easy to get approved for. You can track your progress with free daily credit score and report updates from WalletHub.
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