A secured credit card has its benefits. Mostly, it is a great option for first-time credit card users. This works like a regular credit card. When you use it, you need to pay it back. This payment can be in installment or at one time. If you fail to pay it all at once, the balance carried over to the next billing cycle will increase. Finance charges will be added to it. Since secured credit cards usually have a higher interest rate, you can bet that this amount will also be big.
Unlike the regular credit cards, a secured card will require you to make a deposit. That deposit will be against the credit limit of the account. This security deposit will be considered as collateral. In case you cannot pay off your balance, this deposit will be taken as payment. Oftentimes, the credit limit of a secured credit card is a percentage of the security deposit. It will depend on the credit card company.
According to reports, there is an increasing number of people signing up to own secured credit cards. It is not as popular as regular credit cards but the fact remains that it grows in popularity.
But what if you are someone who is in the midst of a debt consolidation program? Do you think these secured cards will benefit you?
3 ways a secured credit card helps during debt consolidation
The answer to the last question is a huge yes! A secured credit card can bring a lot of benefits to your current attempts to consolidate your debts. This is especially true if your debts are mostly caused by credit cards.
Reports reveal that 7 out of 10 payments are done with credit cards. You can just imagine how easy it is for people to abuse their credit cards. So it is not surprising if people are in deep debt because of the way they use their credit cards.
But this is where secured credit cards can be of help. Here are the three ways this type of credit card will help your debt consolidation efforts.
It controls your credit spending
First of all, it teaches you to control your spending. There is a limit to how much you can spend. Ideally, the security deposit is your credit limit. So in essence, you are limited by how much you are willing to deposit – which is money that you have now. If you deposit $500, that is your limit. It is not reliant on how much the creditor thinks you can earn in the future. Credit limits of regular cards usually reach thousands of dollars. Sometimes, they do not even check your income before they give this limit. And that leaves a lot of room for abuse. By having a smaller credit limit, your spending will be controlled. It is a great way to deal with credit spending issues.
It helps you develop better credit habits
Since your credit spending is controlled, it will help you develop better habits. This is specifically when it comes to your use of credit cards. You know your limitations because of the deposit you made. Because of this, you will be forced to choose your credit expenses. You will be more cautious about what you will use your credit card for. And when you reach your limit, you will be forced to pay it off first before you can spend some more.
This is a great habit to have. It will keep you from overspending. It will change the mindset that some people have about credit cards being an extension of their wallet. Instead, your perception of credit cards is that it has a limit and you have to pay it back. This change in mindset will not just help you avoid debt problems in the future. It will help control your expenses so you will not compromise your budget. That way, your debt consolidation payments will be secure.
It allows you to improve your credit standing
A secured credit card will not just help you control your spending or develop better habits. It will also improve your credit standing. Despite the deposit, it still reports your activity with the credit bureaus. So every transaction and payment will be recorded. If you stick to your credit limit and you do not miss out on a payment, you will slowly and steadily improve your credit reputation. Together with your debt consolidation efforts, it should be easier to increase your credit score. The debt consolidation program you are using will help you stick to your payments by making it easier. The secured card, on the other hand, will ensure that you will not make the debt situation worse. It will act as a support for your efforts to get out of debt and improve your financial situation.
Facts about a secured credit card
Before you decide to use a secured credit card during debt consolidation, make sure you completely understand what it is all about. It will help you understand how to use it properly. By doing that, you can develop the right habits that will allow you to tame your debt situation and keep you from landing in the same predicament.
Here are the important facts that you need to know about secured credit cards.
We all know that there is a need to provide a security deposit. But what some people don’t know is that there are additional fees associated with that. You have application and processing fees. There is also the annual fee – which is similar to regular credit cards. Make sure you shop around so you can find the best card with the lowest possible fees.
Higher interest rates
It is possible that you will be asked to pay a higher interest rate. This is especially true if your credit score is less than stellar. These cards are not really known to offer competitive rates. But with its increasing popularity, it is possible that credit card companies will start to offer better rates.
Earn interest on deposit
Some companies will put your deposit in an interest-bearing account. If you are able to pay your dues and do not give them a reason to get this deposit, there is a chance that it will earn a lot of interest. The longer you keep the secured card open, the more you will earn.
Convertible to unsecured
You should also know that a secured credit card can be converted to an unsecured card. That means there is no need to give the deposit anymore. Of course, you have to prove that you can manage your credit wisely. If so, then converting should not be a problem.