But a growing number of people are beginning to use a secured card – a credit card backed by collateral – to make purchases and build their credit.
Here are the pros and cons to using a secured credit card:
Pro: You can get one with any size credit limit. The size of your credit limit is dependent only on the amount of money you are willing to put forth to open the account. Some companies will accept anywhere from $200 to $10,000.
Con: A secured credit card requires cash to open. You’ll need to have an ample amount of money to reach the minimum deposit to open the account. This can be a big hurdle for people who do not have a spare $250 to lock up in a credit card account.
Pro: You can always pay it off. A secured credit card can always be paid off in full by simply closing down the account and using the security deposit or collateral to repay the remaining balance. This is a great feature for people who have had credit card debt problems in the past.
Con: Secured cards rarely offer rewards. Rewards are limited mostly to unsecured credit cards, which usually have larger credit lines and offer the potential for higher spending.
Pro: A secured card will allow you to build credit. Secured credit cards are treated no differently than other credit cards. The card will report to the credit bureaus, which will help build up your credit each time you make a payment on time.
Con: Carrying a balance will still cost you money. Interest is charged on secured card balances, regardless of how much collateral you also have to secure your card. Be sure to pay in full when possible to avoid any interest or finance charges.