They were easy to get because the lender had zero risk. Because the consumer deposited an amount into a savings account that was held as security against the line of credit, default simply meant the credit issuer taking the savings account.
Because the credit card was treated just like any other card in terms of monthly statements, interest, and reporting to the credit bureaus, wise use helped the consumer build a reputation for paying bills on time. Thus his or her credit score would begin to rise.
Eventually, after a year or so of on-time payments, the card could be converted to a normal, unsecured card, and the credit limit was usually raised as well.
Now, all of a sudden, fewer banks are offering these cards. Why are they doing that?
Because all credit card issuers are worried about right now is profit. They want to issue cards only to those people who will become a greater source of revenue for them while offering the least risk of default.
Secured cards don't meet that test.
Because they are generally low-limit cards, even charging 18-20% interest doesn't earn much for the card issuer. If a person is only carrying $200 in debt, at 20% they're only paying $3.33 per month interest. So even if they've paid a $30 annual fee to use the card, at the end of the year, the card issuer is only about $70 richer.
They do charge the set up fees, the processing fees, and usage fees, but even those don't make up for collecting . Also, because the new regulations set to go into effect next year will limit those fees, many card issuers are hurrying to get out of the secured credit card business now.
Card issuers would much prefer to do business with a card holder who carries $4,000 in debt and pays 10% interest - for interest of $33.32 per month. That's about $400 per year. Next, card issuers are getting "snooty." They don't want to associate with people who don't have a proven track record - as shown by a good credit score.
A few card issuers do still offer secured cards - but all offers are not alike. So do check all the details before you apply.
Check the fine print for these items: A card that reports to the credit bureaus Added fees - this is important! Rates - They range from 7.99% to well over 20% A grace period - If you're paying in full each month, you don't want to pay interest from the day you charge until you pay the next bill A "graduation" provision - so that you can move on to an unsecured card later
Should you be looking at secured or unsecured credit for your needs? The answer to this depends on what it is that you need credit for. It also depends on the dollar amount involved as lenders have limits on what they will allow under the term of unsecured credit. You want to take the time to talk with lenders and find out what your options are. Make sure you also find out exactly how much that credit is going to cost you to repay.
People often struggle with the issue of obtaining either secured or unsecured debt. There are some pros and cons to each one of them. You will have to decide which is right for you based on your needs. It also depends on the lender though as they may only be willing to offer you one or the other.
Most types of unsecured debt come with lower dollar amounts for personal use. For example your credit cards or a personal loan you take out to use to repair you car or even for a vacation. Too many people don't take unsecured debt seriously because they feel they have nothing to lose.
Failure to repay unsecured credit can result in severe damage to your credit report. This is going to affect your ability to get credit you need in the future. Your account can be turned over to collection agencies as well. They can tack on huge fees and even get a judgment against you where a percentage of your wages will be garnished.
For loans that involve an amount higher than $10,000 you will generally need to have it secured. Most new vehicles and all houses you want to purchase are going to cost you more than that so they fall into the category of secured credit. This means that the lender has something of value they can take if you don't repay the money as agreed. They can take your home or your car and sell it. You may still owe them money too if they can't sell the item for what you owe them.
You need to consider secured debt very carefully because you could end up losing your asset if you don't have the ability to repay the loan. This could still end up as a situation where you have to come up with more money though because the lender will sale the asset for what they can. This may not be enough to cover your debt with them. With the number of homes going into foreclosure, you need to make sure you don't get involved with a payment you can't easily make each month.
There are plenty of options out there for you that involved both unsecured and secured debt. As long as you are very responsible with the debt you have there won't be any problems with you getting future credit that you need. The consequences for bad credit though are very grim so be wise with your decisions.
You will also find that when you really don't need credit, you will get offers pouring in. Avoid those unsecured credit card offers that come in the mail unless you really need one for emergency purposes. Any time that you are looking into accessing either secured or unsecured debt, you need to make sure you do your homework so you can get the very best deal.
Both John Rasor & Robert Bain are contributors for EditorialToday. The above articles have been edited for relevancy and timeliness. All write-ups, reviews, tips and guides published by EditorialToday.com and its partners or affiliates are for informational purposes only. They should not be used for any legal or any other type of advice. We do not endorse any author, contributor, writer or article posted by our team.
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