Brought to you by Neo Financial:
The year 2024 could be a year that the banking industry grapples with a set of unique challenges in an economic landscape characterized by a slowing global economy and increasing divergence among regions.
As we enter this year, it’s quite obvious that the income generation and cost management approaches of traditional banks are in for a test like never before. However, amid this changing financial landscape is one powerful tool that individuals and businesses can both deploy and negotiate to maintain a strong financial standing: the secured credit card.
Understanding Secured Credit Cards
Not as glamorous and glitzy as the regular ones, personal and business secured credit cards are the workhorses of the credit-building world. Unlike regular credit cards, this one will require you to make a security deposit which then becomes your collateral.
Benefits of Secured Credit Cards
One of the key advantages of a secured credit card is that it can help you build credit or rebuild a history of credit for your use in the future. Traditional credit cards may be difficult to get if you have a limited or damaged credit history, but secured cards provide a path forward.
Also, secured credit cards pose less risk for lenders. Depositing to open the account gives the lender confidence that they will not end up empty-handed if you fail to make payments. This reduced risk usually means that eligible applicants with not-so-perfect credit may still be able to get a loan with a secured card.
Another benefit is spending limitations. With a pre-set credit limit determined by the amount you put down as a security deposit, you can’t exactly overspend or amass vast quantities of high-interest debt, which fosters responsibility.
Steps to Get a Secured Credit Card
The first step is all about honestly assessing your financial situation. This includes how much you earn, in addition to an understanding of whether you’re in a position to make regular payments before you take on the responsibility for any new debts.
The next step is to go online or call the issuers and compare their secured credit card offerings. Look for cards with reasonable fees, competitive interest rates, and a path towards graduating with an unsecured card.
Lock in your choice once you’ve found an appropriate secured credit card. You’ll usually need to provide some personal and financial information on the application.
Responsible Use of Secured Credit Cards
Now that you have a secured credit card, it’s time to use it. Make sure to use it well and manage your limit. As much as it might tempt you to max out your credit limit, it’s always best to have your credit utilization minimized, ideally at 30% or less of your limit.
Making timely payments is paramount. Paying your bills consistently carries a lot of weight, so your payment history will reflect positively on this component of your credit score. Other charges with high interest should be avoided as well. Pay off your full balance monthly to avoid interest on the charged items.
Common Mistakes to Avoid
A secured credit card has its benefits, but you should be cautious of the risks that come with it. Getting overwhelmed by overspending on the card can strain your finances and is counterproductive to the point of using the card responsibly. Spend within the payment range that you can afford by sticking to your budget.
Never make the mistake of missing any kind of payment. The delays in payments can adversely affect your credit score, further creating an issue in your attempts to build financial health. To avert this error, you can set automatic reminders or payments that will never allow a delay to happen at all.
Another big mistake people make is ignoring the terms as well as fees and costs related to their secured card. Thoroughly read and understand the terms and the associated fees and costs related to your secured credit card. It may include, without limitation, annual fees, interest rates, and any penalties.
Lastly, don’t be tempted to close out your secured credit card before you should. You’re closing an account that can lower the average age of your credit history and lower your credit score. Keep your secured card open until you can upgrade to an unsecured credit card.
Final Thoughts
Secured credit cards may be one of the least glamorous financial tools, but they have a unique power – the power to help you rebuild your financial foundation. Secured credit cards provide a sensible choice for individuals and businesses on the recovery path as they may be issued to individuals with no credit, help to build or rebuild credit, lower the risk to credit card issuers, encourage responsible spending, and offer a revolving line of credit.
In the end, financial soundness opens up avenues for pragmatic decision-making and sensible financial habits. Secured credit cards are just one part of it, but they’ll help you in your endeavor for financial success if you’re careful with them.
