Secured Credit Cards: For Those Who Lack Credit

A “secured credit card” works just like a standard credit card.  You can use it to pay for goods and services anywhere credit is accepted.  In fact, it looks no different than a regular credit card, and no one should be able to tell the difference.

However, it is quite different because it requires the cardholder to open an associated savings account or provide a security deposit. The savings account or deposit works as collateral for the credit line, and thus makes the credit card “secure.”

Secured credit cards require this collateral because the cardholder most likely has bad credit or no credit history at all. In short, the collateral is used in place of a credit history, which is normally sufficient to extend a line of credit.

Who are secured credit cards for?

In order to get a credit card, many “no credit” and “bad credit” consumers must turn to secured credit cards to establish, build, or repair their credit. So there’s also a good chance the applicant was denied by standard credit card issuers prior to applying for a secured credit card.

However, secured credit cards are a great way to gain access to a credit card because they typically don’t require a credit check.  Not only that, but they also build credit history because the activity is reported to the major credit reporting bureaus. This differs from prepaid credit cards, such as The Approved card from Suze Orman, which don’t build your credit!

So over time, assuming you make on-time payments, your credit score will improve as a result. Before long, you’ll be able to convert your secured credit card to a standard unsecured credit card, or apply for other standard credit cards.

That’s really the main purpose of a secured credit card.  To establish a healthy credit history. Just note that if you miss any payments on your secured credit card, they will also show up on your credit report and hurt your credit score.

Tip: Don’t charge a lot on your secured credit card.  Just use it to make a few purchases each month that you know you can pay back in full. This will still positively affect your credit score, without the worry of getting into debt and paying costly finance charges.

Secured Credit Card Terms

The terms on secured credit cards aren’t always so great.  Most have very high credit card APR, typically 20% or higher, along with hefty fees, so the privilege doesn’t come for free.

Many are riddled with costs, including application, processing, and annual fees.And even after paying those fees you could be denied, so be sure to inquire about how the process works before applying.

Also ask if funds are refundable assuming the secured credit card is not granted.

Even though it’s a secured credit card, the issuer may not want you as a customer so it’s important to know all the details beforehand.

What credit limit can I expect on a secured credit card?

Once you get approved for a secured credit card, the creditor will establish a credit limit anywhere between 50-100% of the total deposit you make. If the secured credit card requires you to make a deposit in an associated savings account, the issuer will pay you interest on the funds in your savings account, so it’s not a total loss.

If the secured credit card issuer simply asks for a “security deposit,” the money is kind of held captive until you close your account. Additionally, the money used as collateral cannot be used to make regular monthly payments. So be sure you have money left over to make any necessary payments.

Also note that the secured credit card issuer may require that the deposit be kept in the account for a certain period of time, such as 12 or 18 months, similar to how a bank CD works.

Most secured credit cards have a minimum deposit of $50 or so, typically in increments of $50 or $100, up to several thousand dollars.

Put simply, the more you deposit, the more you can spend on your secured credit card.

How to Get a Secured Credit Card

You can get a secured credit card just as you would any other credit card. Your best best is to shop around online to see the available offers.

Most of the major credit card issuers offer secured credit cards, so compare costs and do your homework before applying.

But beware of secured credit card scams, as they are rampant and prey on consumers with poor or little credit.

In summary, while a secured credit card may seem like the only way to build credit and raise your credit score, reviewing your credit report for errors and/or getting someone to co-sign with you may be a better option.

If you have a bad credit score, find out why your credit score is low. You may be able to improve it and apply for a better, unsecured credit card.

Read more: Another alternative to a secured credit card is a credit builder loan.

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