When it comes to building credit, there are a few options available. Two popular options are secured credit cards and authorized users. Both can help individuals establish or improve their credit scores, but they work differently. In this article, we will compare secured credit cards and authorized users to help you determine which option is best for you.
What is a Secured Credit Card?
A secured credit card is a type of credit card that requires a security deposit to be approved. This deposit acts as collateral for the credit card company, reducing their risk in case the cardholder is unable to make payments. The deposit amount typically determines the credit limit for the card.
How Does a Secured Credit Card Work?
To obtain a secured credit card, an individual must first make a deposit with the credit card company. Depending on the credit limit desired, this deposit can range from a few hundred dollars to a few thousand dollars. The credit card company will then issue a credit card with a credit limit equal to the deposit amount.
The cardholder can use the secured credit card just like a traditional credit card, making regular purchases and payments. However, if the cardholder fails to make payments, the credit card company can use the deposit to cover the outstanding balance.
Pros and Cons of a Secured Credit Card
Pros:
- Helps build credit: A secured credit card can help individuals with no credit history or a low credit score establish or improve their credit.
- Easy to obtain: Secured credit cards are easier to obtain than traditional credit cards since the deposit acts as collateral.
- Can be converted to a traditional credit card: Some credit card companies may offer the option to convert a secured credit card to a traditional credit card after a certain period of responsible use.
Cons:
- Requires a deposit: The main disadvantage of a secured credit card is the required deposit, which can be a barrier for those with limited funds.
- May have high fees: Some secured credit cards may have high annual fees and interest rates, making them more expensive than traditional credit cards.
- Limited credit limit: The credit limit for a secured credit card is typically equal to the deposit amount, which may be lower than desired.
What is an Authorized User?
An authorized user is someone who is added to an existing credit card account by the primary cardholder. The authorized user is issued a card with their name on it, but they are not responsible for making payments on the account. The primary cardholder is responsible for all charges made by the authorized user.
How Does Being an Authorized User Work?
To add an authorized user to a credit card account, the primary cardholder must contact the credit card company and provide the authorized user’s information. The authorized user will then receive a credit card linked to the primary cardholder’s account with their name on it.
The authorized user can use the credit card just like the primary cardholder, making regular purchases and payments. However, the primary cardholder is responsible for making payments on the account, and any missed payments will affect both the primary cardholder’s and the authorized user’s credit scores.
Pros and Cons of Being an Authorized User
Pros:
- No deposit required: Unlike a secured credit card, no deposit is required to become an authorized user.
- Can help build credit: An authorized user can help individuals establish or improve their credit score, as long as the primary cardholder makes timely payments.
- No responsibility for payments: As an authorized user, you are not responsible for making payments on the account, reducing the risk of damaging your credit score.
Cons:
- Limited credit-building potential: Being an authorized user may impact your credit score less than having your own credit account.
- No control over payments: As an authorized user, you have no control over payments made on the account, which could negatively impact your credit score if the primary cardholder misses payments.
- Potential for fraud: As an authorized user, you are not responsible for payments, but you are still able to make purchases on the account, which could lead to potential fraud or overspending.
Comparison of Secured Credit Cards and Authorized Users
Credit Building Potential
Both secured credit cards and authorized users can be beneficial for individuals who are looking to establish or improve their credit scores. However, it’s important to note that while both options have advantages, a secured credit card tends to impact an individual’s credit profile substantially. This is primarily due to the fact that a secure credit card is essentially an individual’s own credit account, providing them with the opportunity to build and demonstrate responsible credit behavior in a more direct manner.
On the other hand, being an authorized user is more of a secondary credit-building alternative, as it involves being added to someone else’s credit card account without actually being held responsible for the primary account.
Responsibility for Payments
When obtaining a secured credit card, it should be well understood that the primary cardholder assumes complete responsibility for making timely payments towards the outstanding balance on this particular account. In the unfortunate event of the cardholder’s failure to meet their payment obligations, it is within the credit card company’s rights to utilize the deposit made as collateral to settle the remaining balance.
On the other hand, as an authorized user of the secured credit card, the onus does not fall upon you to fulfill any payment requirements. However, it is essential to acknowledge that if the primary cardholder encounters any missed payments, such instances have the potential to impact your personal credit score detrimentally.
Cost
Secured credit cards are a type of credit card that usually necessitate a deposit from the cardholder, and this deposit varies in value, falling within the spectrum of a few hundred dollars all the way up to a few thousand dollars. Essentially, this deposit serves as a form of collateral for the credit card company, mitigating the level of risk they face in providing credit to the cardholder. On the contrary, opting to become an authorized user on a credit card account does not entail the need to make a deposit; however, it is important to note that additional fees might be associated with adding an authorized user to the said credit card account.
Credit Limit
The credit limit for a secured credit card is typically set at an amount that is equivalent to the deposit made by the cardholder, and it is worth mentioning that this amount may sometimes fall short of what the individual might have initially desired or anticipated. However, when it comes to being an authorized user on someone else’s credit card, the credit limit that one is granted is determined by the primary cardholder’s overall credit limit. In some cases, this credit limit may actually surpass the initial deposit amount that is required for a secured credit card, thus providing the authorized user with a potentially higher credit limit to work with.
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Which Option Is Best for You?
Your best option will depend on your financial situation and credit goals. If you have limited funds and are looking to establish or improve your credit, a secured credit card may be the best option. However, if you have a family member or friend with a good credit score willing to add you as an authorized user, this may also be a good option.
It’s important to consider the potential risks and benefits of each option and choose the one that aligns with your financial goals and capabilities.
Conclusion
Both secured credit cards and authorized users can be effective ways to establish or improve your credit score. However, they work in different ways and have their own pros and cons. By understanding the differences between the two options, you can make an informed decision on which one is best for you. Remember always to make timely payments and use credit responsibly to achieve your credit goals.
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