Pros and cons of secured credit cards
We've previously made note of how it takes time, ingenuity and good spending habits to build credit, especially for millennials. One of the recommendations you often see, after a cursory Google search for something like "credit building tips," is to consider opening up a secured credit card account.
Before getting into the lowdown of this card type, we should say it certainly isn't unwise to get a secured card. But there are pros and cons. Credit-strapped young professionals should know what factors play into both. Let's take a look at these cards, their primary advantages and noteworthy disadvantages:
Basics of secured credit cards
A secured credit card is largely similar to prepaid debit: Both are issued by traditional creditors and require investment by their users. By depositing funds from a non-credit bank account (or, in prepaid debit's case, cash or check at your bank's branch), you provide the financial institution collateral that eliminates or at least mitigates their risk. As NerdWallet illustrates, if you deposit $300 of your own money, you then have $300 in credit or debit. (There are exceptions - partially secured cards that require a deposit smaller than the credit line you'll receive - but these aren't the norm.)
The primary difference between the two is that using a prepaid debit card doesn't reveal anything to a creditor except that you had money you're now spending through a different channel. On the other hand, timely repayments of balances from secured credit card purchases usually end up on your credit report and all major credit scoring models.
Pros: Building credit when you otherwise couldn't
Secured credit cards' biggest perk is the opportunity to show good credit utilization and a knack for debt repayment, especially for millennials whose issue isn't bad credit, but the lack of credit. Gerri Detweiler, director of consumer education for Credit.com, elaborated on this advantage:
"Someone who has no credit is likely to benefit more quickly from a secured card, because there's no negative information - there's just no positive information, so in as little as six months someone who is just building credit can get an unsecured credit card," Detweiler said.
Even if you have less-than-ideal credit, demonstrating that you've learned from past mistakes by using a secured card is still ultimately positive, because of how much credit scores affect your overall finances. The Huffington Post recommended paying off as much as possible each month and keeping credit utilization around 10 percent to get faster results.
Cons: Interest rates and more
Secured cards typically have moderate-to-high interest rates and fees so creditors can further mitigate risk. This can make it harder to regularly make full-balance (or simply above the minimum) monthly payments. Additionally, while a variety of account types is good for your score, secured and unsecured credit cards look the same to creditors.
Not all secured cards report to the Big Three credit bureaus. Make sure yours does when applying - this information should be somewhere in the card agreement. Last but not least, the main drawback to secured cards is the time it'll take for them to have a major effect. If you're having trouble with such a card, consider pursuing other sources of credit like alternative lending.