Experts Weigh Pros and Cons of Secured Credit Cards

Secured credit cards are gaining popularity in the U.S. because of the shifting perceptions and spending habits of millions of consumers. With the economic slowdown forcing Americans to reevaluate how they spend their money and use credit cards, many cardholders are choosing to switch to secured cards to better protect their credit scores and ratings.

However, industry experts are warning cardholders to be aware of the dangers and added risks that come with secured cards. They agree that while secured cards give consumers a better chance to ensure that their credit ratings remain intact, they can also lure many cardholders into a false sense of security. Specialists contend that it would be best to weight both the advantages and disadvantages of having a secured card before even thinking of getting one.

According to experts, consumers should only opt for secured credit cards if they are trying to rebuild their credit. The low credit lines help cardholders rein in their spending and limit their purchasing power. This gives them a better opportunity to control their spending habits and behaviors. Also, they point out that most card issuers usually report purchases and credit activities to the three credit agencies. Most American consumers often make the mistake of believing card companies that purchases made using secured credit cards will not be reported to the credit bureaus.

While the low credit limits help cardholders control their spending habits, they can also damage a consumer’s credit ratings. Credit scores are computed partly based on the ratio of the cardholder’s unpaid debt to present credit limits. Because secured credit cards have relatively very low credit lines, consumers who reach half that limit can see their credit scores fall as the debt-to-credit limit ration rises. Most banks card companies also require an initial $200 to $300 deposit. Consumers who use their secured cards immediately and rack up $100 to $150 in credit purchases, would in fact, be using up half their credit limit.

Card issuers also slap higher interest rates on secured cards to make up for the low credit limits. They often resort to higher rates because of the relatively low revenues they will receive from this particular type of card. Companies would even charge clients setup fees when they apply and qualify for a new secured credit card.

Because of these pitfalls, some experts recommend using secured credit cards to rebuild credit scores and ratings. They warn consumers against using this type of card as a regular credit card due to its many disadvantages.