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Is a secured credit card offer right for you?

Friday, July 13, 2012 at 10:49:50 AM

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Whether you're brand new to credit card use or you have had cards in the past but run into some financial difficulties that lowered your credit rating, you probably know just how difficult it can be to qualify for this kind of financing.

Fortunately, one great way that those with low or no credit ratings can get themselves into the world of credit card borrowing is through a secured credit card.

You may have heard about this kind of card in the past and wondered what it was. It's actually pretty simple: When you fill out the credit card application for this account, you will be required to give a down payment - usually it will cost a few hundred dollars - in lieu of a credit check.

The practical benefit of this is that you qualify for the card as long as you have the money to open it, and this will allow you the ability to begin borrowing on the account as you would any other type of credit card. And in doing so, you will be able to establish or rebuild your borrowing history in a positive manner.

What to watch out for

As you might expect, there are a few drawbacks with using a card designed specifically for people with bad or no credit.

For one thing, because these cards usually have a credit limit of just a few hundred dollars, it can be very easy to max out. On the other hand, it will also make it easier to pay back the balance in full at the end of every month, which means that the most important thing in dealing with a secured account is spending and repaying responsibly.

Further, these accounts typically also have higher interest rates than other types of cards, and therefore, carrying a balance over from one month to the next can be pretty costly. As with making sure to not max out the account, keeping your balance low will also help you avoid sizable interest charges.

And along similar lines, there are typically more, and larger, fees on these accounts, which can make them a little more difficult to afford.

Finally, you will also need to make sure that the secured credit card offer you sign up for will actually report to the credit bureaus. This is the only way in which you will be able to build up your credit score to a respectable level.

Know your credit before you apply for a credit card.

If you are like many people, you may assume a few financial mishaps mean that you cannot qualify for a 'normal' credit card offer. If erroneous, this assumption could cause you to miss out on the best credit card available to you. Not sure where you stand? You may want to apply for a credit card for people with fair credit and see what happens. You may be pleasantly surprised. And one advantage an online credit card application is that the turn-around is much faster than in the world of paper so you won't lose much time.

Going forward

Because of the high rates and fees, and low credit limit, this kind of account is really only for consumers who need to rebuild their standing, and should be used as a kind of credit card training tool.

Using this card, and doing so responsibly, will simultaneously establish their standing as a creditworthy borrower and also give them the wherewithal to pursue better credit cards in the future.

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