What is a secured credit card?
A secured credit card is a credit card backed by the cardholder’s cash deposit. This deposit serves as security for the account and provides security to the card issuer if the cardholder is unable to pay. With a secured credit card, the amount you deposit becomes the credit limit of your credit card.
Secured credit cards are usually issued to subprime borrowers or people with poor or limited credit history (so-called thin borrowers). Because card issuers report secured credit cards to credit bureaus, these cards can help borrowers improve their credit scores.
Central thesis
- A secured credit card is a credit card secured by a cash deposit in case the cardholder defaults on payment.
- A secured credit card works just like any credit card, except for the security deposit.
- Consumers typically purchase secured credit cards to improve their credit score or build a credit history.
- Secured credit cards generally have lower credit limits and higher fees than unsecured credit cards.
How secured credit cards work
Most credit cards are unsecured: there is no guarantee or “safety” to pay your accrued balance, which is basically money owed to the credit card company. Your contract with you states that you agree to pay all or part of the balance each month, but you do not provide any assets or income to fulfill that commitment. (This is one reason credit card interest rates are so high: Unsecured debt is always more expensive than secured debt such as secured debt or auto loans to cover the lack of collateral).
How to apply for a secured credit card
You can apply for a secured credit card just like a regular credit card. They are issued by almost all major credit card providers, such as Visa, Mastercard, and Discover, and look the same.
Cardholders can use the card anywhere the card brand is accepted and eligible for privileges and rewards. Cardholders also receive a monthly statement showing their ending balance and activity on the card for the specified month. You are responsible for paying at least the minimum amount due, and you will pay interest on any outstanding amounts specified in the loan agreement.
Secured credit cards may have an annual fee – just like regular cards. They may also charge some other fees such as B. initial setup or activation fees, credit increase fees, monthly maintenance fees and balance inquiry fees. All of these affect your deposit and available balance levels, so they need to be checked before signing up.
With a secured credit card, you can do some settings based on your agreement with the credit card company. When you apply for a secured credit card, the card issuer evaluates your creditworthiness and credit history through rigorous checks with credit bureaus. It then determines the deposit amount required to open the account and the credit limit that will be extended.
How does a secured credit card deposit work?
With a secured credit card, the cash amount you deposit as a deposit becomes your credit limit – the amount you can load onto the card. Since the deposit used to open a secured credit card account serves as security, it is not available to the borrower after payment, but it remains.
You can lose your deposit, but usually secured card issuers will only use it if you miss or miss a certain amount of payments. If you cancel your card, your deposit will be refunded to you, provided your balance has been paid. Alternatively, some secured credit card providers periodically review the borrower’s payment history and convert the secured credit card to a regular credit card if they make regular payments. In this case, you will get your deposit back.
Is a secured credit card any good?
Secured credit cards are an expensive way to get credit, but they can be very useful for people looking to improve their credit score.
There are still many costs associated with secure cards, which make them an expensive way to lease. Annual interest rates (APRs) on secured cards tend to be high—often in excess of 20%—but are currently in line with the national average of just under 20% as of November 2021. 1 But if you are a secured card candidate, your credit may not be the best and you are not eligible for the best price anyway. So 20% or more probably won’t be much more expensive than other forms of credit available to you.
On the other hand, secured credit cards are great for borrowers looking to improve their credit score. Secured credit cards are aimed at people with poor or very low credit history—those who struggle to qualify for a regular credit card. The deposit paid compensates the credit card company for the additional risk involved in lending.
How to Build Credit with a Secured Credit Card
Buying a secured credit card and using it responsibly for a few months or years may be the recommended way to build or improve your credit history and/or improve your credit score. Unlike prepaid credit cards, which are more like debit cards, secured credit cards send your account history to the credit bureau, which is included on your credit report. 2 This means that using a secured card can gradually improve your credit score.
If you maintain a good payment history, secured card lenders may increase your credit limit over time or even offer to upgrade you to an unsecured card (in which case you can get your deposit back). In order for this positive story to continue, you usually have to pay off the balance in full each month — and on time, of course. When you miss a payment, the lender reports the default to the credit bureau, which can hurt your credit score.
However, be aware that boosting your credit score in this way could do more harm than good if you miss a payment. While consumers typically buy secured credit cards to boost their credit, when a payment default occurs, their credit can be adversely affected.
Secured Credit Card Example
The Discover it Secured Card is one of the most popular secured cards on the market and is a typical secured card in terms of fees and interest rates.
Discover generally accepts borrowers in the “fair” credit category – i.e. H. People with credit scores in the 580-670 range — and borrowers with the lowest credit history. The minimum collateral required to open an account is $200, and the maximum credit limit can be as high as $2,500, depending on your income and ability to pay. After eight months, the account will be reviewed to determine its eligibility for a transfer to an unsecured card, at which point the borrower’s deposit can be refunded.
The Discover it Secured Card offers massive cash back rewards and has no annual fee – just like the Unsecured Discover Card. It has a variable APR of 22.99% as of February 2021.
How are secured credit cards different from unsecured credit cards?
With a regular unsecured credit card, no deposit required. With a secured credit card, the money you borrow from the card issuer is backed by a deposit.
This deposit serves as security for the account and provides security to the card issuer if the cardholder is unable to pay. This reduces the risk for card issuers, which in turn means borrowers with poor or limited credit histories can use secured cards.
Do secured credit cards build credit?
you can. Secured credit cards are aimed at people with limited or poor credit history and are a great way to improve your credit score. By making regular, reliable payments with a secured credit card, you can improve your credit score and get cheaper forms of credit.
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