If you don't know much about secured credit cards, you might have some misconceptions about them. There are a lot of myths floating around about these type of accounts, mostly due to people not fully understanding how they work. It's only by learning the truth about secured credit cards can you recognize the benefits.
Myth #1: Secured Credit Cards are Only for People with Bad Credit
If you have a bankruptcy, foreclosure or repossession, a secured credit card helps reestablish your credit history. But these cards aren't only for people with bad credit, they're also useful if you need to build a credit history from scratch. For this to work, you need to get a secured credit card from a bank that regularly reports to the credit bureaus. Timely payments add positive activity to your credit report. However, establishing credit is a catch-22. It takes credit to build credit. But without a credit history, most banks won't approve your credit application. This is how a secured credit card helps. It gets your foot in the credit world; and since anyone can qualify providing they have a security deposit and income, it's the perfect tool for those who need to build credit but can't qualify for an unsecured credit card.
Myth #2: Secured Credit Cards Don't Have Monthly Payments
Although a secured credit card requires a security deposit (which is equal to your credit line), this deposit isn't prepayment for future purchases you make with the credit card. The deposit secures the line of credit or acts as collateral. You'll still receive a monthly statement just like any other type of credit card, and you'll have to make minimum payments every month. The bank issuing the credit card places your deposit in an interest-bearing account, and they'll only touch this money if you don't repay the credit card.
Myth #3: Secured Credit Cards Aren't Real Credit Cards
Secured credit cards may have smaller credit lines and require a security deposit, but they're not fake or prepaid credit cards. These are real credit cards that can be used wherever Visa or MasterCard are accepted. When you present your card at checkout, most retailers won't be able to tell whether the credit card is secured or unsecured.
Myth #4: A Secured Credit Card Prevents Getting an Unsecured Card
Having a secured credit card doesn't put a red flag on your credit report, nor does it prevent other credit offers. These cards are a steppingstone to an unsecured credit card. As a matter of fact, after consistently making timely payments for 12 to 18 months (depending on the credit card issuer), the company may convert your secured credit card to an unsecured card and refund your security deposit.
Myth #5: Secured Credit Cards Have a Higher Interest Rate
Interest rates vary by credit card. And yes, some secured credit cards do feature higher rates. But this isn't the rule across the board. Some secured credit cards offer low, competitive rates around 10% or 11%, although you might pay an annual fee, a set up fee and a monthly maintenance fee. So it's important to compare offers to make sure you're getting a low-cost secured credit card.