What Is A Secured Credit Card?

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A secured credit card is offered by the credit card issuer to a cardholder only if the latter can guarantee the loan with an asset, as collateral. Unlike unsecured loans, a secured credit card represents a loan given even if the applicant does not have a good credit score, because of the aforementioned collateral.

In most cases, before issuing the secured credit card, the card issuer will ask you to make a deposit equal to the amount of money you borrow through the credit card. On the other hand, you can also open a credit card line of only 50% of your deposit. The deposit is usually $300 to $500. Aside from this particular distinction, everything that follows resembles to using an unsecured credit card.

Many credit card issuers can offer you a secured credit card, but not all of them do; however, if you’re a credit union member, asking them for a secured credit card is safer and cheaper, as they offer you the lowest interest rates and no annual fees.

Reasons to apply for a secured credit card

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Getting your first loan as a student or young individual, with no credit history, is difficult or even impossible. Moreover, those with bad credit scores have little hope of receiving another credit. In these two particular instances, the best alternative is getting a secured credit card. By doing so, you will be able to build a good credit history, as a base for future unsecured loans or rebuild your damaged credit score. On the other hand, if you can get an unsecured credit card, applying for a secured one makes no sense.

Side benefits of secured credit cards

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The fees applied for secured credit cards vary largely. There are some types of secured credit cards with a fixed APR, regardless of whether you are late with your payments or not. This type of credit card is best for those who don’t have a regular income and cannot always make timely payments. Other credit cards offer benefits such as up to 100% travel accident insurance or high introductory savings rates, e-banking access, no application processing fees, or even free rental car insurance.

Debits cards versus secured credit cards

One might wonder: if you are to deposit a sum equal to the amount of money you borrow, why not use a debit card instead? After all, the money you get from the card issuer is, in fact, your own money. The answer is simple. Debit card issuers do not report to credit bureaus. If your goal is to build or repair your credit history, using a debit card will not help you, since the issuer does not lend you any money, but you use your own money instead.

Another interesting difference to consider is that, when using a debit card, you spend your own money, withdrawn from your bank account. If you spend it slowly, you even get the chance of benefitting from the small interest rate the bank pays for using your money. On the other hand, if you get a secured credit card and make an initial deposit, you will have to make monthly payments using other money, while your deposit is safe and not touched by the secured credit card issuer.

What to consider when applying for a secured credit card

  • Since the purpose of applying for a secured credit card is to build your credit or improve your credit history, make sure the credit card issuer reports to all the major credit bureaus (TransUnion, Equifax and Experian) every month. Because reporting your credit is optional, some issuers don’t make these monthly reports.
  • Credit card issuers use your deposit differently. Some of them use it to deduct all the fees associated with the credit card, significantly reducing your credit line. Others use the deposit to cover for your late payments and, in some cases, to cover only for a single late payment. On the other hand, there are credit card issuers that will actually offer you an interest rate on your deposit. When applying for a secured credit card, you should prefer the latter and, preferably, have all your fees charged to your card instead of the deposit.
  • Some issuers offer you the possibility of converting your secured credit card to an unsecured one. Their conditions for being able to do so are: make timely payments for a certain period of time (in most cases, 6 months), in which case your secured credit card might be automatically converted to an unsecured one within one year maximum; do not exceed your credit card limit; do not max out your credit line. Some card issuers will refuse to convert your secured credit card and you might resort to another company. If this happens, do not forget to ask your initial deposit back, along with the potential interest you might have gained.
  • Like unsecured credit cards, some secured ones also have a grace period policy. This grace period is the time that passes between you making your first purchase with the secured credit card and the time when the credit card issuer starts charging interest on your loan.