What is a Secured Credit Card? A secured credit card a type of credit card backed by a cardholder’s cash deposit when you open the account.
Secured credit cards require a deposit that serves as collateral for purchases using your card. If you default in your payments, the card issuer keeps your deposit.
Secured credit cards usually offered for those who do not have a credit history or who have a limited credit history yet require a credit card network.
Otherwise, as long as you keep your account in good standing. Your credit card issuer will refund your deposit after a few months or when you close your account.
Even if you deposit security for the credit limit, you can use secured credit cards in the same way as you use any other credit card. Swipe to buy it up to your credit limit and pay your balance on time every month.
Along with standard reporting to credit reporting agencies, these cards can help borrowers improve their credit profile.
Note
The credit limit on your secured credit card will usually be equal to your security deposit. In some cases, your credit limit may be larger than your security deposit, which depends on the card you choose and your credit rating.
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How a Secured Credit Card Works
Most credit cards are unsecured: there is no guarantee to “secure” your ability to pay the balance you have earned, which is basically what you owe to the credit card company.
Its contract with you agreed to pay your balance in full or in part each month, but you are not putting any of your assets or income to return that promise.
Once the initial deposit is paid, the secured cards act like unsecured ones:
- You can use them wherever credit cards are accepted, including online
- And also You can build or rebuild your credit by using the card responsibly and paying your balance on time
- You incur interest if you carry a balance
Most major credit card issuers offer both secured and unsecured cards. Annual fees are common, but you should not pay more than $ 50. You can find many options in our favorite secured cards at no annual fee.
With a secured credit card, you do something as part of your agreement with the card company. When you apply for a secured credit card, the card issuer assesses your credit score and credit history through strict inquiries with the credit reporting agency.
It then determines the deposit amount and credit line required to open the account which will be extended. Basically, the amount you deposit becomes your credit limit – the amount you can put on the card.
Secured credit cards vs. prepaid credit cards
The major difference between a secured credit card and a prepaid credit card is the customer’s credit history.
A secured credit card is given to a customer who has a limited credit history or none and is usually given to build his credit.
The customer has a secured card in exchange for a fixed amount with the bank to deposit as collateral. The deposit offered becomes the credit limit of the card provided. The credit limit can increase by adding sufficient funds to the account or if you have a good repayment history. The bank will add a fixed amount to your monthly limit.
On the other hand, prepaid credit cards do not include any collateral. As the name suggests, it prepaid and comes with a credit limit provided by the bank based on several factors.
These factors are the customer’s credit report, credit score, and payment records that demonstrate the customer’s ability or inability to repay the amount spent.
If you do not have enough credit, a secured credit card is the safest option because it does not charge a high-interest rate like unsecured credit cards and does not have high annual or joining fees.
However, for unsecured credit cards, it is advisable to keep your expenses low and pay them in full at the end of the month. The credit utilization ratio should be between 10% -20% maximum. Having a secured credit card means spending wisely and not more than you can pay.
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Good Things About Secured Credit Cards
Secured credit cards can be a good option for building or rebuilding your credit. There are five benefits that stand out to consumers with steamed credit or no credit.
- When you cannot get approved for a traditional credit card, you can often get approved for Secured credit cards. Payment of security deposit eliminates credit risk from the credit card issuer.
- They typically report to credit bureaus. Unlike a prepaid credit card that acts more like a debit card, secured cards will send your credit history to be included in your credit report.
- A card can help you establish or re-establish your credit. Since payments included in your credit report, making timely payments and managing your balance will help improve your credit score. After increasing your credit score, you can qualify for a regular credit card.
- Your security deposit used only if you default in your payment. As long as your default balance does not exceed your deposit, you will not be sent to collections to default on your payments.
- You can earn rewards on purchases with certain cards, such as the Discover and Navy Federal Secure Cards. If you pay your balance regularly before depositing an interest balance, it can help offset the amount of your security deposit.
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