Why get a secured credit card? Wouldn’t it be easier just to spend your own money?
Yes, it would be easier, but it wouldn’t be helpful in terms of building your credit, which is the purpose of a secured credit card.
These cards require both an annual fee and a savings account which is held as security against the credit line on the card. Thus the credit card issuer has no risk and anyone can obtain the card – regardless of their credit history.
Careful use of a secured credit card will gradually raise the card holder’s credit scores, enabling him or her to become eligible for a standard credit card.
This card is good for people who have poor credit, and also for those who have not yet established credit. For instance, young people just out of school who still live at home and don’t even have a power or phone bill to give them a financial reputation.
A tool for parents to help children establish credit:
At one time parents could employ a method called piggybacking to help their children establish credit. They simply put the child’s name on their own credit cards so their good credit would also be reported under their child’s name and social security number.
That method ceased to be effective when credit card issuers became aware that the practice was being abused. Businesses had sprung up selling the piggyback opportunity.
Now, a parent can simply fund a savings account for their child to use as security. Once the child has established credit, the money is returned with interest.
These cards do carry a high interest rate and should be used only as a tool for building credit scores. The holder should never carry a balance of more than 30% of the credit line and should pay the entire balance in full and on time each month.
Because these credit card issuers do report to the credit bureaus, after a few months to a year, credit scores will begin to rise. Then the card can be replaced with a traditional credit card.
Pre-paid cards do not carry the same benefit
Pre-paid credit cards do have valid uses, but building credit is not one of them. These transactions are not reported to the credit bureaus.