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While making my final credit card payment, I decided to take a look at my previous cards on Credit Karma. I remember that one card that pissed me off. It was my CapitalOne secured credit card.
When you’re over your credit limit and there’s nowhere to turn, in desperate times, nothing makes sense. But now I clearly see why it makes sense. Let me break it down for you.
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How does a secured credit card work?
A secured and an unsecured card both function the same way; there are no differences between the two. With one exception, you must pay a down payment to the bank in order to receive a secured card.
Even if the bank can determine from your credit history that you’re a risky borrower, they still don’t want to reject you as long as you agree to their conditions. Banks are in business to make money, and they are successful at it.
Three years ago, when I applied for the Capital One secured credit card, I was required to deposit the total sum they could trust me with before they would send me the card. It was only $300, though.
That sum seemed like a slap in the face for some reason. When my family needed a simple item, it was a struggle and an embarrassment. It was at that point that I began to reason myself out of it.
How do secured credit cards generate revenue for banks?
It functions in the same manner with an unsecured card as we already described. You must understand, though, that using a secured credit card is essentially gambling with your own money. Why do I say that?
Suppose you spend $100 of your credit limit on groceries. You can only make the required $25 payment. The bank will charge you $10 in interest at the end of the billing cycle for borrowing your own money.
In addition, there is a $40 late payment fee if you don’t pay on time. I believe the credit bureaus like Experian, TransUnion, and Equifax will be aware by the time you make that missed payment. How’s that? I failed to do so once, and a month after that, my credit dropped four points.
The banks are aware that they could make a sizable profit by only crediting you a small amount. The Consumer Financial Protection Bureau claims that credit card companies’ penalty practices cost consumers $12 billion annually.
Which banks have the best Secured Credit card?
Personally, I believe that any card, regardless of bank, will have the same effect. However, there are two things I look for in credit cards in general: no annual fee and a low annual percentage rate (APR). This can differ depending on how bad your credit is.
Some secured credit cards like the Discover it secured card provide benefits like earning rewards points and up to 2% back in cash back at restaurants and gas stations. The CapitalOne Platinum secured card is a wonderful option if you’re searching for a low security deposit as low as $49.
Is it good to have a secured credit card to establish your credit history?
Yes, having a secured credit card can be a great place to start if you’re looking to improve your credit history. Because, as I mentioned above, you’re technically using your own cash from the bank’s point of view.
But if you have very bad credit and you’re out of cash, just like I was a couple years ago, I will suggest that you do otherwise and look into making some changes to repair your credit yourself.
Now, if you consistently pay off the full balance on your secured credit card by the due date, your bank may eventually suggest switching to an unsecured card. Some companies will even boost the credit line while returning your deposit.
When this occurs, you’ll know your credit is improving.
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Gio founded TheGrowthFocusedGuy in January 2020 because he was fed up with debt.
His mission is to document his journey to Financial Independence in order to motivate and inspire others to get out of debt and begin building generational wealth.
