Many younger people get understandably excited when they get their first credit card. In our culture, having a credit card provides a lot more freedom. On top of that, having a personal card serves as a great reminder that they are on their way to becoming an adult.
Not too long after getting their first card, however, a lot of questions tend to pop up. For example, what’s the difference between a secured and unsecured credit card? How does a secured credit card work? What are the pros and cons associated with each type?
These questions and more often represent a whole new world of information to a lot of people. Listed below are six common issues that can cause confusion with new account holders as they begin using a secured credit card.
1. Consumers today have a lot of options.
One of the things that surprises a lot of people dipping their toe into the credit card pool is how many options are available. There are many different kinds of cards, and all of the varying types have different strengths and weaknesses.
When choosing a secured credit card, take time to really understand what using a secured card entails. Many people make the mistake of getting their first card and charging it right up to the limit. With consumer debt being such a huge problem for so many, this is certainly not the best way to start off.
For those who are learning to use a credit card for the first time, a secured card makes a lot of sense. Cardholders won’t be able to run up a huge amount of debt using a secured card. This is a great feature not only for young people but also for those with past credit problems. That means it makes a great credit builder card.
The point is that nowadays there is probably a card to suit just about any type of user. That’s a good thing. But as you might expect, it will take time for you to research what makes the most sense for you.
2. Your payment history will be reported to credit bureaus.
Something that surprises many people — but probably shouldn’t — is that personal payment histories are reported to credit bureaus. Credit bureaus determine credit scores for consumers and businesses and are responsible for issuing credit reports. Whenever someone doesn’t pay their debts on time, they should expect to receive a bad credit rating.
Credit reports help people understand their personal credit situation. Personal payment history on secured credit cards is given to credit bureaus along with the cardholder’s Social Security number.
If the cardholder pays their bills on time, this is a good thing. It will stand them in good stead when they want to take out a loan for something as substantial as a vehicle or starter home.
3. Late payments typically incur fees or increased interest rates.
Anyone new to the world of credit cards might be dangerously unfamiliar with how interest rates and fees work in practice. This is at least one reason why many people are tempted to max out a new card.
Credit card companies charge consumers interest, calculated as an annual percentage rate (APR), for carrying a balance. Cardholders must pay interest on what they bought using the credit card on top of the principal (i.e., the balance). Those percentages add up quickly.
If payments are late, consequences kick in. Banks typically charge fees or increase the cardholder’s interest rate. Every time a payment is late, this decreases the owner’s credit score. These consequences stack up every time a late payment occurs. If a cardholder must carry a balance, it’s in that person’s interest to pay well ahead of the due date.
4. You can get your deposit back on a secured card.
When applying for a secured credit card, a deposit is required. This deposit represents the credit limit for that card. Secured card customers are able to get their deposit money back.
Typically, there are two ways this happens. The first is when a cardholder advances from using a secured card to an unsecured credit card. This typically takes 12-18 months of paying the secured credit card bill in full and on time. Once a cardholder moves from a secured credit card to an unsecured one, they get their deposit back.
The second way is to close the secured card account. When closing the account, all debts must be paid in full. If not, the bank will garnish some or all of the deposit to cover the outstanding balance.
5. Secured cards don’t require a high credit score.
When considering a credit card, many people assume that good credit is needed. Fortunately, those applying for secured credit cards need not have good credit or even any credit. Many companies offer secured credit cards without a credit check and will instantly approve applications.
Consumers with no credit history or past credit problems can easily get a secured card. This will help them get to work building a credit rating (or restoring one).
Be careful when applying for your first card, though. Many have high-interest rates and/or expensive fees. Sometimes cardholders get charged fees for things they did not anticipate. As they say, always read the fine print.
Look for cards that don’t conduct credit checks and have a low APR. You’ll also want to make sure your candidate cards offer clear and straightforward information on any and all associated fees.
6. Secured credit cards and debit cards are different animals.
There are a few key differences between secured credit cards and debit cards, but those differences are extremely important. The first is that secured credit cards will influence your credit score while debit cards will not.
Secured credit cards are available to consumers at age 18. On the other hand, an individual can get a debit card, with parental assistance, at age 13. Banks don’t issue credit cards to minors, as irresponsible use of finances is more likely.
The second difference lies in the source of funds. Debit card users are spending their own money. Secured credit card users are spending the bank’s money (even though that money is protected by the cardholder’s deposit). This is why most banks will charge interest on a secured card. These small differences can be game-changers, financially speaking.
Secured cards are useful financial tools, but they must be used responsibly and wisely. When used as intended, they can be incredibly helpful for establishing or boosting an individual’s credit rating.
