Americans have a conflicted relationship with credit-builder/secured credit cards.
A CardRatings.com survey found that people with these cards are less satisfied than customers of other types of credit cards. And yet, people with credit-builder/secured credit cards are less likely to feel they could do better with another credit card.
In effect, these customers feel trapped in a bad relationship. To some extent, that’s the kind of trap that comes with having bad credit.
However, there’s no need to feel trapped. If you understand how credit-builder and secured credit cards can benefit you, they can actually be a pathway out of the bad credit trap.
What are credit builder and secured credit cards?
Credit-builder cards are any credit cards that are available to consumers with poor or no credit record.
The credit building part comes from the fact that they report your credit use and payment history to the credit bureaus. This gives you an opportunity to establish a credit record, and build a positive payment history.
Many credit-builder cards are secured credit cards. These are cards that require you to keep a security deposit with the card company. This is not like a pre-paid card. Your charges on the card are not paid for out of that deposit. Instead, you are required to make monthly payments to pay off what you’ve charged just as you would with an ordinary credit card.
Where the security deposit comes in is that it gives card companies the confidence to extend credit to people who otherwise wouldn’t qualify for it.
Credit card survey: What consumers think of secured credit cards
How do consumers feel about this type of arrangement?
The CardRatings’ survey found that on average, respondents rated their satisfaction with credit-builder/secured credit cards as lower than for any other category of credit cards.
Normally, if people aren’t satisfied with a product, they look for better alternatives. However, most customers with credit-builder or secured credit cards don’t feel there’s a better alternative out there for them. This is why they may feel trapped with these cards despite being less than thrilled with them.
Financial barriers for people with bad credit
The likely reason people with these cards don’t feel they have a better alternative is they recognize that people without good credit face financial barriers.
CardRatings did an analysis of data on credit card agreements compiled by the Consumer Financial Protection Bureau (CFPB). The CFPB data found that most unsecured credit cards are not available to people with no credit score or a score below 620. In contrast, 93% of secured credit cards are available to those consumers. In other words, those cards are often the only option for people without good credit scores.
Compared to other types of credit cards, these options are fairly limited. Secured credit cards represented just 7% of the credit cards studied by the CFPB.
Not only are credit card choices for people without good credit limited, but they are also more expensive. Cardratings found that the best interest rates available for secured cards are higher on average than those for unsecured cards. The analysis also found that secured cards are more likely to charge an annual fee than unsecured cards.
Think about it. First, people with secured cards are required to keep money on deposit with the credit card company. Then they are likely to pay more for those cards than people with other types of credit cards. Finally, their lack of a strong credit record severely limits their other choices.
Taking all that into consideration, it’s easy to see why customers with credit-builder products feel trapped in a less-than-ideal situation.
Secured credit cards should be a path, not a destination
Instead of feeling trapped by their secured credit cards, consumers should think of those cards as a potential way out.
Secured credit cards give you an opportunity to build a credit history. Whether you’re trying to establish a credit history for the first time or rebuild credit after some past mistakes, secured cards can often give you an opportunity other cards won’t.
The key is to use that opportunity for credit repair or to establish a positive credit history. As the analysis of the CFPB data showed, a better credit score can give you more choices, and more affordable choices.
You might not be able to get there without using a secured credit card. The key is to use that card to build the kind of credit history that will allow you to move on to better choices.
➤ SEE MORE:How long should you keep a secured credit card?
Tips for improving your credit score
Here are some tips for using the opportunity provided by a secured credit card to build a better credit record:
- Use credit regularly. You can only build a positive credit history by using credit regularly. For any credit card you’re considering, check the issuer’s practices for reporting usage to credit bureaus. Look for a card that regularly reports to one or more of the major credit bureaus, and start building a steady record of charges and payments.
- Make all your payments on time. Payment history is the number one factor in determining credit scores. Make sure the record you’re building is a good one. Pay at least the minimum required amount on time every month.
- Keep balances low. Whenever possible, pay more than the minimum required amount on each bill. This will help keep your balances low. Having low balances outstanding is good for your credit score.
- Make use of credit counseling and financial education. The more you know, the more effectively you can use credit. If there are things you are having trouble with, don’t be afraid to get help from a credit counselor. Also, use online resources to research information about credit use.
By limiting you to fewer and less attractive choices, bad credit can certainly feel like a trap. But credit-builder products and secured credit credit cards don’t have to be part of that trap – they can be your ticket out of it.
