Wondering how secured credit cards work? Lets dive in.
What are secured credit cards?
Secured credit cards are a type of credit card that require a security deposit in order to be used.
The security deposit serves as collateral for the credit limit on the card. In other words, the credit limit on the secured credit card is typically equal to the amount of the security deposit.
Secured credit cards are designed for individuals who have poor or limited credit history, or who have had credit issues in the past. Because the security deposit reduces the risk for the credit card issuer, secured credit cards are typically easier to obtain than unsecured credit cards.
Just like with an unsecured credit card, the cardholder can use a secured credit card to make purchases, pay bills, and build credit. The cardholder is required to make monthly payments on the balance owed, and the credit card issuer reports the cardholder’s activity to the credit bureaus. Over time, responsible use of a secured credit card can help build credit and improve credit scores.
It’s important to note that secured credit cards often come with higher fees and interest rates than unsecured credit cards. However, they can be a useful tool for individuals who are looking to establish or rebuild their credit.
How do secured credit cards work?
Here’s how they work:
- Security deposit: To open a secured credit card account, the cardholder must make a security deposit with the credit card issuer. This deposit acts as collateral for the credit limit, and the amount of the deposit is typically equal to the credit limit on the card.
- Credit card usage: The cardholder can then use the secured credit card just like any other credit card, making purchases and payments as needed. The credit card issuer reports the cardholder’s activity to the credit bureaus, which can help the cardholder establish or improve their credit history.
- Payments: The cardholder is required to make monthly payments on the balance owed, just like with a traditional credit card. However, if the cardholder is unable to make a payment, the credit card issuer can use the security deposit to cover the amount owed.
- Refunds: When the secured credit card is closed or upgraded to an unsecured credit card, the security deposit is refunded to the cardholder. This is typically done as a statement credit, but can also be refunded via check or direct deposit.
Secured credit cards are often used by people who are new to credit or who have poor credit, as they can be easier to obtain than traditional credit cards.
However, they typically come with higher interest rates and fees, so it’s important for cardholders to use them responsibly and pay off the balance in full each month if possible. Over time, responsible use of a secured credit card can help build credit and improve credit scores, making it easier to obtain other types of credit in the future. This can go along with pursuing rent-to-own home programs for people that want to become homeowners in the future but have credit restrictions now.
Is a secured credit card something you’d try?