One of the unsung benefits of a secured credit card is that you have money tucked away in a deposit account. Not only did that cash help you get a credit card because it guaranteed the credit line, it forced you to save some cash. Assuming you used the card responsibly, the entire amount will be returned to you when you close the account with no balance due. Some credit card issuers will automatically convert secured credit cards into unsecured cards when you treat the account responsibly for a certain number of months, or will do so upon request.
The minimum deposits for secured credit cards range from a couple of hundred dollars to thousands. Getting that money back? Here’s what to do with it when the cash is released to you.
Maintain savings in a CD
You’ve already become used to having that money set aside, so keeping it under lock and key may not be a hardship. If it was a relief to know the cash was always there, its a sign that you’ll be happy to continue.
You can put the money into a savings account, but these deposit accounts have a small flaw. They can be a little too accessible. Consider a certificate of deposit (CD) instead. With it you can deposit that cash for a specific term and earn decent and guaranteed interest with the fixed annual percentage yield (APY).
Let’s say you have $1,000 being released to you. You’ve been fine without it for the past two years, so why not go for another term. If you open a 24-month CD with an APY of 4.30%, your earnings will be $88 for doing nothing more than letting it sit there. And since there’s an early withdrawal penalty you’ll be less likely to take the funds out when you don’t really need to.
Delete costly credit card debt
If you have another credit card that you owe a balance on, you may want to use the released funds to pay it down or off. The financial gain can be huge.
For example, if you owe $1,000 on a credit card with 28% APR and only paid the minimum, it would take 93 months (7.75 years) and cost $1,380 in interest. And that’s if you never made another charge with that card.
Why not just wipe out the entire balance and be done with it? Not only would you eliminate the finance fees, you wouldn’t have the monthly payment to send. If the balance were close to the limit, the paid-off debt could even give your credit rating a boost, since credit utilization is a major credit scoring factor.
Surprise your kids with a “yes”
If you have children, one of the most gratifying things you can do is treat them to something special that you’ve been denying for a while.
Think about what the kids have been begging for but your answer has been a consistent, “no – that’s too expensive right now.” They may have become accustomed to your negative response, so now surprise them with a “yes!”
A returned security deposit can go toward everything from a new pair of trendy sneakers, to tickets to an amusement park. Whatever the case, it should be specific to their desires while not sacrificing your family’s financial stability.
Buy something important you’ve been putting off
Chances are high that there are at least a few things that will enhance your life but have been back burner-ing because of the price tag. They aren’t absolutely necessary expenses, but they would make a big improvement in your life. A security deposit that is now back in your hands can make that happen.
Just a few possibilities include nonessential dental work or medical treatments, tuition for a class you’ve been wanting to take or enrolling in a program that can get you to the next level with your career, and replacing an old mobile phone with the most current version.
The idea is to not fritter it away on something you won’t notice or even remember in a few months.
Send an extra mortgage payment
If you own your home and still have a mortgage, consider sending an extra or larger payment with that money. You can tell the lender that you want it to be applied to the principal, too. Because the interest on home loans is calculated on the balance, reducing that liability lowers the financing fees you’ll pay.
Here are a couple of examples to motivate you:
Current loan balance: $100,000
Monthly payment: $1,000
Interest rate 4.75%
With a single lump $500 payment you will save $151 in total interest.
With a single lump $1,000 payment you will save $300 in total interest.
Although you won’t see the benefit of using the money as an extra mortgage payment right away, you will know for sure that it will be a positive financial decision.
Get ahead of other bills
Imagine what it would feel like to not have to pay your cell phone, utilities, and garbage bills for a month. By applying the security deposit to those expenses early, you can give yourself a much needed break.
You can also use the money to make an additional payment to a personal, car, or student loan. If you do this, alert the lender that you are applying those funds to a future month so you don’t get another bill when you don’t expect it. Chances are they would anyway but communicating your plan can avoid potential confusion.
Satisfy a tax obligation
In the event you have a tax bill to pay this year and don’t have the money in your checking or savings account, seriously consider sending the security deposit to Uncle Sam.
If you pay your tax debt in full (and file your taxes on time) you can avoid penalties that will be assessed for late filing and paying late. The IRS will also assess interest that will accrue on top of those penalties, which can increase your debt substantially.
While it’s no fun to use a security deposit for tax debt, it’s certainly a sound financial decision.
Indulge, at least a little
What gives you pleasure but you choose to forgo because it lives far outside your budget? Maybe it’s a massage, tickets to a concert or sporting event, a really nice dinner out, or a fabulous new handbag. Whatever the case, it’s something you want but don’t get because it’s too expensive.
If you’ve been denying yourself pure pleasure for too long, it’s time to give yourself a treat. You can spend the entire security deposit on the desire or just a portion of the money. Make it meaningful.
Bottom line, remember what a credit card security deposit is
Although it can feel like a windfall or a gift, a security deposit that was being held by the credit card issuer is money that you earned. It’s yours, that you set aside to do something important: get a credit card that you can use to your advantage. Now use the cash for something else that’s valuable. The choice is yours.