4 Benefits of a Secured Credit Card

Secured credit cards use a collateral in order to extend financing. This means you will place an asset on hold with the lender, and the lender will give you funds in the form of a credit card in return. Your credit card contract will define terms you must fulfill in order to receive the asset back. Because a credit card is a revolving form of debt, you will be able to choose how much to spend and how much to pay back each month. This flexible financing option comes with other benefits.

Lower Interest Rates

Secured lines of credit have lower interest rates because they are less risky for the lender. The lender allows you to share in the risk of the loan when you place your asset as collateral. Typically, a lender will extend financing in an amount somewhat less than the value of the asset. This means they will hold onto something that is more valuable than the loan itself, assuring against default. If you do default, they can seize the asset and sell it for cash. With this low risk type of financing, they do not need to continually assess high interest rates. 

Higher Limits

You will generally see higher limits on a card that you secure with collateral than on an unsecured credit card. Your limits will be set on an unsecured card based solely on your salary and your credit score. Most Americans have assets that are much greater than their monthly salaries. If you own a home, car or business, you have an asset base that is a large portion of your net worth. You can put this asset to work by securing working capital from the use of it as collateral. Relying on your credit alone will not give you the same results. 

Easier Acceptance Process

Your application will receive less scrutiny when you are applying for a secured line of credit. For the reasons discussed earlier in this article, a secured line is much less risky for the lender. They do not need as many assurances against default from you because you are already providing them with a large assurance. If you have not been in your job very long or have just graduated, for example, you may reach road blocks with unsecured credit lines. Your application will be much more appealing once you agree to supply the asset, and you will be able to achieve financing even if it is not perfect.

Variety of Options for Collateral

You can use just about any asset as collateral. This does not just mean the standard options such as home or car; you can use stock or a savings account to secure a line of credit. The large advantage of these options is your asset will continue to increase in value or pay dividends even as it is being held by the lender. This means you can effectively subtract those earnings from the interest rate, making stock-secured and saving-secured financing very affordable.


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