Secured credit cards are the cards that are easily given out to people with no credit history and those with poor credit history. These cards are easy to obtain because banks and other financial institutions issue them only after the applicant has made a deposit upfront. The credit limit on the card is dependent on the amount deposited with the bank by the applicant. Though these cards are definitely better than the regular credit cards, it is better to understand the benefits and drawbacks of the secured credit cards before opting for them.
The first benefit is that it is easy to get approval for this card. This is a blessing for first time applicants who have not been able to obtain a card without a credit history. The security deposit acts as an incentive, making the lender process your application faster. Most of the banks report the transaction on secured credit cards to the credit bureaus. This gives you a great opportunity to build your credit history without taking any undue risks. For people with a poor credit history, this card can work wonders in helping you fix your credit flaws.
Another benefit with secured credit cards is that you will not be harassed by collection agents to repay your dues. Since your deposit will be used if you don't make your payment on time, you will have to ensure you don't exceed your deposit and max out the card.
Moreover, banks will pay interest on the amount that you have deposited. You can continue to earn interest as long as the bank is not forced to use your deposit as payment.
Though there are a number of benefits, there are a few drawbacks that you need to be aware as well. First of all, you will have to pay a high amount of money as security deposit in order to get a decent credit limit. This may not be possible for most people.
There is also a processing fee associated with the card. This will just add to the cost of availing it. The interest rate on these cards is very high as compared to most of the other cards. Hence, you will have to use them wisely to stay out of debts.