Secured Credit Cards

Secured Credit cards are a great way to make purchases and keep records of your spending. Secured Credit cards also provide a way to save money by deferring payment on items and thereby earn more interest on your money.

For example, if you have a money market account that gives you 5% annual interest and you spend $1000 a month through your credit card, you can keep that $1000 in your money market account for an additional month. At the end of a year you would have earned an additional $51.16 for doing nothing.

Now $51 may not be much but it's free!

Also you can use your secured credit cards statement to keep track of exactly how much you are spending and where your money goes. With some credit cards you can use personal finance software like Quicken of Microsoft Money to download your credit card transactions from the Internet right to your home computer.

Secured credit cards may also offer a rewards program where you get cash back, frequent flyer miles or discounts on services and merchandise.

Secured Credit cards are convenient. Some purchases, especially those on the Internet, will only accept credit card payment. Also you don't have to continually go to the bank or ATM to get cash.

Secured credit cards also provides a measure of safety. You don't have to carry large amounts of cash for large purchases. Even if your card or credit card number is stolen, you are not responsible for the thief's use of your card.

Disadvnatages of Secured Credit Cards

But secured credit cards can also be major liability. Too many people spend up to their credit limit and then just make the minimum payment each month.

This will keep people paying that 18% rate for years. A $1000 purchase can end up costing $1500 when paid off after 5 years. Ironically many of these same people will wait months for a sale so that the item's price goes down 10-20% and then make a purchase on their credit card and end up giving the savings to the credit card company instead.

Average household consumer credit balances have now topped $7000. The monthly interest charge for a credit card charging 18% interest is over $100. More than $1200 a year just in interest.

Sometimes secured credit cards can lead a person into living a lifestyle that is beyond their means. If a person gets in the habit of dining out two to three times a week and these meals are paid for by credit card, the card balance increases quickly. Often the additional expense was not planned or budgeted. People can even end up spending more each month than they actually earn.

This can continue as long as the credit card balance is below the limit and the person makes their regular monthly payments. But as soon as the credit limit is reached, many credit companies will increase the credit limit and give the person more room to get into debt. I have personally seen a credit card limit expanded by $10,000 within three months.

This cycle can continue until the person is required to make a minimum payment that is more than they can afford. Now not only do they have to cut back on the lifestyle they have grown accustomed to over the years, but they also have to either increase their income or cut out things they enjoyed before increasing their lifestyle with their secured credit cards.

Also what happens if the person is suddenly out of work or has to take a pay cut or lower paying job. That's right, the credit card bills keep coming. And many people rely on the remainder of their credit limit to supplement their income until they are working again or can find a better paying job.

We have seen this cycle in America increase average credit card balances each year and eat up the equity in many people's homes. Home equity loans are used as secured credit cards to live a lifestyle that is beyond people's means. Or to purchase toys they really can't afford to buy let alone keep and use.

What's the solution?

Firstly pay off your secured credit cards balance each month.

Don't fall into the habit of living off your credit cards. If you have $2000 of disposable income to spend each month, whether through secured credit cards or in cash, only spend the $2000.

If you have developed bad credit habits, cut up your secured credit cards, or only keep one for emergencies and resolve to pay off the balance each month. Then create a plan to get yourself out of debt and stick with it.

You can relieve stress, avoid family conflicts and sleep better at night knowing that there are no credit card companies harassing you.

What if you have severe credit card debt problems?

Possibly the best option is to consolidate all your credit card debt into one low monthly payment. A debt consolidation loan can cut your monthly payments by up to 50% and put cash in your pocket. This will relieve the financial stress and allow you to rebuild your credit. Click Here for more information on Debt Consolidation Loans


Another option is to transfer all you credit card balances to one new low interest credit card. Then pay off as much as you can afford each month.