Secured Credit Cards - Pros and Cons
Avoid High APR Credit Card Debt and Improve Personal Budgeting
Nov 1, 2009
Whilst unsecured credit cards for poor credit are difficult to find, a secured credit card may be available for U.S. citizens. They involve using a home or property as collateral for any money that is borrowed. They are completely different to a pre-paid credit card where cash is loaded on to the card; this means that lenders don't report to credit reference agencies.
Advantages of Secured Credit Cards
- Bad credit. Unsecured credit cards for poor credit can be very difficult to find. This means that individuals with an adverse credit history can reserve hotel rooms, pay their garage bill etc.
- Approval. It is easier for a borrower to receive acceptance than on a credit card for poor credit. It isn't necessary to make multiple applications which show on credit report for 12 months.
- Improve credit. Providers report to the leading credit reference agencies (Experian, Equifax and TransUnion). This means that it is possible to improve credit scores over a period of time.
- Personal budgeting. Families are able to budget better and use credit when finances are tight.
- Avoid credit card debt. The provision of collateral means that interest payments will be lower. This means that a higher percentage of each monthly payment goes towards clearing the principal.
- Introductory rates. New customers can regularly benefit from a low introductory rate, balance transfer deal or an incentive program.
- Credit limit. The limit will be higher than on unsecured credit cards for poor credit.
Disadvantages of Secured Credit Cards
- Collateral. Failing to maintain repayments or defaulting on the agreements could lead to the lender foreclosing on the property the debt is secured on. This wouldn't be the case with a regular card.
- Credit card charges. Although the interest rate is normally lower, there are often a number of charges (annual, application and processing fees). These represent a hidden cost that isn't taken into account by a lot of new borrowers.
- Exceeding credit limit. The borrower will incur further charges for going over their credit limit.
- Personal debt. Individuals who find it difficult to control impulse buying could find that being given access to a new source of credit could exacerbate financial difficulties.
Credit Cards for Bad Credit and Secured Debt
They are an ideal way to re-build credit, especially when unsecured credit cards for poor credit aren't available or the terms aren't favorable. However, securing debt on a property gives creditors greater opportunity to recover the money they are owed in the event of default. Perform a careful assessment of the pros and cons of secured credit cards before signing-up to a new credit agreement.
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