A secured credit card features a credit limit and requires high-risk cardholders to deposit money into the account, which is then held by the financial institution that issues the card.
The items you buy with your credit card then go against your credit limit, reducing the amount you can spend. In addition to making a deposit that goes against your card's credit limit, you may have to pay annual or monthly fees.
When you pay your card balance in full (preferably each month), your credit limit returns to the original level or may be increased.
Once you prove your credit worthiness over time, your card can be converted from a secured to an unsecured card – and a deposit will no longer be required.
Now, you may be wondering: "does a secured card mean that I’m essentially paying extra to have access to my own money?” The answer is... yes.
Yet, a credit card that is secured may be the only type of card you can get if you have poor credit or no credit at all. And, these secured cards allow you to rebuild or establish your credit rating.
Secured cards differ from prepaid cards because of the line of credit that is extended to you, providing the opportunity to improve your credit rating.
In essence, a secured card serves as stepping stone to getting a standard, unsecured credit card. With an unsecured card, you have a credit limit for expenditures without having to deposit money ahead of time. However, to get an unsecured credit card, you need to have an acceptable credit rating.
With a secured card, you rebuild or establish your credit by using your card responsibly and demonstrating your ability to make on-time payments over time.
Your account activity is reported to and tracked by the major credit agencies: Equifax, Experian and Transunion. Financial institutions use these agencies to determine your credit worthiness and eligibility for credit cards and loans.
Applying for a Secured Card
You can apply for a secured card by contacting your bank, going online or calling the toll-free number of a credit card provider. Before you submit your application for a credit card, do your research. The terms and fees can differ significantly from one card to another.
During your research process and before you apply, talk with representatives from financial institutions that are issuing secured cards. Ask about card terms and discuss your goals for using the secured card.
Look for a credit card company that offers no application fee and low usage fees. Learn about deposit requirements and payment terms to ensure they meet your needs. Before deciding on a card, always read the fine print.
After Proving Your Credit Worthiness
If you choose, you can hold on to your secured card, even after improving your credit rating and becoming eligible for an unsecured card.
Though most individuals choose to upgrade to an unsecured card when their credit rating will allow – and they are comfortable they are able to pay off their card balances each month.
For more information about credit cards, please see the article links listed below.