A secured credit card is a type of credit card that is backed by a cash deposit provided by the cardholder. It is designed for individuals with limited credit history or poor credit scores. Here’s how it works:
- Security Deposit: When you apply for a secured credit card, you are required to make a security deposit with the credit card issuer. The amount of the deposit typically determines your credit limit. For example, if you deposit $500, your credit limit will also be $500.
- Credit Limit: Your credit limit on a secured credit card is equal to or slightly higher than the amount of your security deposit. This deposit acts as collateral and protects the issuer in case you fail to make payments. Your credit limit represents the maximum amount you can borrow using the card.
- Card Usage: Once your deposit is paid, you can use the secured credit card to make purchases, just like with any other credit card. You can use it for online shopping, paying bills, or making everyday purchases.
- Monthly Payments: You are required to make monthly payments on the card, just like with a regular credit card. It’s essential to make these payments on time and in full to build a positive credit history. Late payments can result in fees and further damage your credit score.
- Credit Building: One of the primary purposes of a secured credit card is to help individuals build or rebuild their credit. By using the card responsibly and making timely payments, you demonstrate your creditworthiness to creditors and credit bureaus. Over time, this can improve your credit score.
- Upgrade Possibility: Many secured credit card issuers review your account periodically. If you have shown responsible card usage and improved your credit score, you may qualify for an upgrade to an unsecured credit card. When you upgrade, you should get your initial deposit back.
Key Takeaways: a secured credit card requires a security deposit. It acts as a tool for responsible credit use. This helps to build or rebuild credit.
Why a Secured Credit Card?
Secured credit cards can be a lifeline for those struggling with bad credit, but approval isn’t guaranteed.
Despite the reduced risk, issuers still assess applicants.
If you’re going through a bankruptcy, have delinquent accounts, or have opened multiple new accounts recently, you still may not be approved. Also, having a reliable income is still essential, as the deposit is used as a last resort.
Once approved, you need to fund the deposit, a crucial step to open your account. Some issuers require immediate funds transfer, while others provide a grace period.
Neglecting the deposit will lead to application rejection.
Once funded, the card is sent to you, functioning like any other credit card.
Responsible Usage is Key to a Secured Credit Card
Aim for credit utilization under 30% and avoid maxing out.
Paying the bill on time and in full is crucial due to the high interest rates common with secured cards.
Regular payments get reported to credit bureaus, aiding your credit score.
As your credit improves, you can seek upgrades.
Some issuers automatically review your account for potential upgrades to unsecured cards, eventually returning your deposit.
In some cases, you might need to request an upgrade, either converting your secured account or applying for a new unsecured card.
If upgrading isn’t an option, you can apply for unsecured cards separately.
Ultimately, closing the secured card allows you to recoup your deposit, marking a significant step in your financial journey.
Learn from Financial Experts
For a complete masterclass in paying off debts, we recommend listening to Dave Ramsey’s Total Money Makeover.
