What is a secured credit card?
Cory
June 23, 2023
What is a secured credit card?
A secured credit card is a type of credit card that requires a security deposit. Security deposits can be funds, but are commonly property. This deposit acts as collateral or security interest, meaning that if a customer fails to make payments on the borrowed funds, the lender has legal claim to the deposit. Secured credit cards are typically targeted towards people with limited or bad credit history who may not qualify for an unsecured card.
How do Secured Credit Cards Work?
The Security Collateral
1. Amount Required: The security collateral is typically equal in value to the credit limit. The deposit amount, and credit limit, may vary depending on the card issuer and the applicant's credit history.
2. How it is Used: The collateral acts as a legal claim for the lender in case the cardholder defaults on their payments. If the cardholder fails to make payments, the issuer can acquire the deposit/property to cover the outstanding balance.
3.Possibility of Getting the Deposit Back: With responsible use, cardholders can sometimes get their collateral back after a certain period, sometimes as are fund. This is dependent on the credit card issuer, so be sure to confirm how this works with the card you are applying for.
CreditLimits
1. Factors Determining the Limit: The credit limit is usually determined by the security collateral, as well as the cardholder's credit history and income.Some card issuers may offer higher limits to applicants with better credit or higher incomes.
2. Gradual Increases: Most secured card issuers allow cardholders to request a credit limit increase after a period of responsible use, such as making on-time payments and keeping balances low. It’s important to note that some lenders may require additional information in order to approve a credit limit increase.
Fees and Interest Rates
1. Annual Fees: Many secured credit cards charge an annual fee, although there are some cards available with no annual fee. Check if the card you’re applying for has an annual fee.
2. Interest Rates: Rates can vary between different cards, so it's essential to compare options.
3. OtherFees: Secured credit cards may also charge fees for late payments, foreign transactions, balance transfers, and cash advances.
Reporting to Credit Bureaus
1. Importance of Regular Reporting: Regular reporting to the credit bureaus (Experian, Equifax, and TransUnion) is essential for building credit history.[1]
2. Frequency:Secured credit cards typically report to the credit bureaus on a monthly basis, allowing cardholders to see the impact of their responsible use over time.[2]
3. Credit Bureaus Involved: Reputable secured credit card issuers report to all three major credit bureaus, though they are not required to do so.
Learning to Manage Credit Responsibly
1. Practice for Unsecured Cards: Developing good habits with a secured card can help cardholders transition to an unsecured card in the future.
Access to Credit Card Benefits
1. FraudProtection: Secured credit cards often provide the same fraud protection as unsecured cards, including zero liability for unauthorized transactions.
2. TravelPerks: Some secured cards may also include travel benefits like rental car insurance or travel assistance.
Choosing the Right Secured Credit Card
Factors to Consider:
1. Annual Fees: Consider the fee when applying for a secured credit card.
2. Interest Rates: Compare interest rates between cards to find the best option.
3. Credit Limit Policies: Research how credit limits are determined and whether increases are possible with responsible use.
4. Reporting to Credit Bureaus: Ensure the card issuer reports to the major credit bureaus.
5. Additional Features or Benefits: Consider any other benefits or features, such as rewards programs or travel perks.
Graduating to an Unsecured Credit Card
Consider applying for an unsecured card after a period of responsible use with your secured card, as well as when your specific card allows you to do so if this is possible.
Steps to Take
1. Reviewing Credit Reports and Scores: Before applying for an unsecured card, check your credit reports from all three bureaus and confirm that your secured card usage has been reported accurately. Also, review your credit scores to ensure they meet the requirements for an unsecured card.
2. Researching Suitable Unsecured Card Options: Look for cards that cater to those with average or fair credit, as these may have a higher likelihood of approval.Compare features, fees, and interest rates before making a decision.
3. Applying for a New Card or Requesting an Upgrade: You can either apply for a new unsecured card with a different issuer or contact your current secured card issuer to request an upgrade to an unsecured card.
Conclusion
Secured credit cards play a crucial role in helping individuals build or repair their credit history. By using a secured card responsibly, cardholders can improve their financial standing and gain access to better credit products in the future. Remember to research and compare different secured credit card options and use them responsibly to pave the way towards a healthier financial future.
Additional information
Citations
[1] [2]https://www.myfico.com/credit-education/whats-in-your-credit-score
Links
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