In this brief blog, we are going to discuss what a secured credit card is and secured credit cards in the UK. These kind of cards help you build credit.
What are Secured credit cards in the UK?🔐💳
Secured credit cards are targeted towards those with little or no credit history. They are not common in the UK but are more common in the USA.
Secured credit cards work like this:
You put a deposit down, sometimes the full credit limit or a percentage of the credit limit. If you miss a repayment then the credit card provider can use your deposit to offset their loss.
You will not be able to use your deposit as long as you have the secured credit card and you can get this back at the end of your time with the secured credit card or if your credit score improves.
Secured cards will have high APRs and will usually charge an annual fee.
A secured credit card is a good way to build your credit score if you can spend less than 30% of the available credit monthly and pay your credit card balance in full each month.
What are Unsecured credit cards?🤷♀️
Unsecured credit cards are what you have likely heard more of. They are credit cards that do not require any cash or assets to be put down as a deposit. The credit limit & APR you are offered is based on your credit score, history and financial information.
If you have little or no credit history you can still be eligible for unsecured credit cards as there are providers who target that market.
Tip: Most credit cards will come with an interest-free period of 56 days from when you make a purchase but this might vary with providers.
Do you need a secured credit card in the UK?
A secured credit card may be relevant for you if:
You’ve had problems with debt in the past
There’s an unpaid bill under your name
You previously went bankrupt
You have a county court judgement (CCJ) against your name
You aren’t on the electoral roll
You have no history of borrowing or have never had a credit card
Will you be credit checked?
Most credit providers will credit check you before they provide you with an offer of credit. This is the case, even though you are putting down a security deposit for your credit card.
Why is your credit score relevant?
Your credit score is very relevant as it determines what APR lenders will charge you for credit.
If you are unsure of what your credit score is then you should check your credit score from the four credit bureaus in the UK: Experian, Crediva, Equifax and Transunion.
Some of these credit bureaus may charge you a fee to view your credit report so what you can alternatively do is request a statutory credit report which is a free credit report which each credit bureau must provide to you upon you requesting it.
Alternatively, you can also use credit score services such as Checkmyfile and clearscore to check your credit report.
Once you have checked your credit report you may see that you have a low credit score and if this is the case then a secured credit card may be the best option to improve your credit score by giving you the opportunity to show good credit behaviour through making your monthly credit repayments on time.
Advantages of a secured credit card
Some of the advantages of a secured credit card are listed below.
Credit cards have payment protection cover:
Due to the consumer credit act, all goods purchased using a credit card which are over £100 are covered by the payment protection scheme. This means if goods are faulty or were not delivered, then your credit card provider must refund you. This cover does not apply to two separate transactions not amounting to £100 separately, even if they were bought in the same store.
secured credit cards help build your credit score:
secured credit cards help build your credit score as they reflect how often you repay your monthly credit card debt on your credit file. They also reflect your credit utilization( this is how much credit you use in relation to your credit limit) and a low credit utilization will aid your credit score whilst utilizing your credit to its limit will reflect negatively on your credit file.
Access to emergency fund
secured credit cards help by providing you access to emergency funds in case you have any financial emergency which requires immediate help. This may be a cheaper method of borrowing than payday loans or other alternative short term finance.
Some secured credit cards will have interest free periods which are long enough for you to put your finances in order before you start repaying any credit card balance you owe.
Pay for expensive items
secured credit cards allow you to buy more expensive things which you may need and spread the payments over a long period. This could be things such as paying a down payment on your rental accommodation.
No annual fees
Most secured credit cards do not have an annual fee.
Easy to qualify for
Most secured credit cards are very easy to qualify for as they are targeted towards people with little or no credit history.
Disadvantages of a secured credit card
Some of the disadvantages of a secured credit card are listed below.
secured credit cards are a bit restrictive:
They tend to offer lower credit limits(usually around £500) and higher APRs are standard. Some may see these are prejudice terms and there might be some truth to that. secured credit cards also have higher minimum payments: these are the minimum you must pay back every month to ensure your credit card provider does not charge you any fees.
Note: Although paying the minimum payment will prevent you from incurring any further charges you will still get charged interest on the difference between your minimum payment and what you owe per month. This could easily turn out to be very expensive for you and should be avoided at all cost.
Avoid the ATM:
Using your credit card at the ATM will incur you huge fees up to 3% of your withdrawal and there are no interest-free periods for using your credit card at the ATM. This is even made worse if you use your credit card at a foreign ATM as not only will you incur this charge you will also incur an exchange rate charge.
The APRs on secured credit cards are much higher as the credit card providers see this area as a very risky area as most people won’t have a full-time job and they may not be able to pay back what they have borrowed. To compensate or to balance the books the high APRS are charged so those who pay back could essentially cover the costs of those who borrow on their credit cards but don’t payback.
Rejections can damage your credit score.
Because getting rejected for any credit application can damage your credit score you should only apply to credit cards which you are sure you will be approved for.
Alternatives to a secured credit card
Some alternatives to a secured credit card could be:
A secured credit loan
A secured credit loan is a loan which you take out that allows you to build up your credit history by making regular monthly loan repayments. When you take out a secured credit loan you aren’t actually given a loan advance but instead, you make monthly contributions which are repaid to you at the end of your “loan term”. By making these loan repayments on time your credit score should rise. Loqbox is a secured credit loan provider in the UK.
A credit builder card
A credit card has the same features as a secured credit card. It is aimed at people who don’t have a good credit score but with a credit-builder card you won’t have to pay any deposit for you to get approved for the card.
In this blog, we discussed secured credit cards in the UK. If you have any questions or comments please let us know.
If you need financial advice and you live in the UK then you could contact the Money Advice service over the phone or via chat for impartial advice.
You can also contact the debt charity “Step Change” if you are in debt and need help.