You can be in a curious kind of bind when you have bad credit. You need good credit to get a credit card or a loan so that you can start rebuilding your credit. But you can't get a good credit card or loan unless you have good credit. This is where a secured credit card comes in. But these are not without their drawbacks. Let's take a closer look.
A secured credit card is a pretty sound concept. What is it that a bank needs a good credit score for to give you a good credit card? It's because a credit card is actually a line of credit with no collateral. How do they know that you will even be able to pay back? They look at your credit score, and it tells them that you are a good bet. What if you just gave them collateral instead? Would that set their minds and ease and persuade them to give you credit card?
That's exactly what a secured credit card is. You just need to open a deposit with a bank that's worth $500 or so, and they give you a credit card that allows you to spend the $500. Whatever the value of the deposit that you leave with them, you get a line of credit on your credit card for that amount. Should you ever default on your payments, they'll just break into the deposit and settle your bill.
A secured credit card can be a great way to rebuild your credit score. Once you show your bank that you are dependable making payments every month, they will learn to trust you and just give you a proper unsecured credit card one day. And the money you leave with them and by way of deposit, actually earns interest.
But of course, there are downsides to getting a secured credit card as well. To begin with, they charge you high interest rates. If you don't pay your balance in full every month, your interest is really going to add up.
You also have to put up with higher fees, and higher penalties. No secured credit card ever matches a good unsecured credit card for fees and penalties. Some people also have a problem with how a secured credit card isn't exactly credit. You're just using your own money the money you've left with the bank. This usually translates to a small line of credit too, if you can't afford to leave thousands of dollars with the bank.
The good part of why you would get a secured credit card is that you hope is that the bank will report your credit card activity to the credit bureaus. Sometimes, they just go and report your activity as secured credit card activity. And that doesn't count as much.