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How A Secured Credit Card Works

how a secured credit card works

Posted by Smart Credit Choices in Smart Credit Card Tips on March 29th, 2012

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Credit cards are only issued to people with some payment history. This criteria leaves out two distinct groups; those who have a poor credit history, and those who have none at all. These groups are often faced with a paradox. They cannot receive a credit card until they build or rebuild their credit, yet they cannot improve their score without receiving credit. The solution to this problem is a secured credit card offer .

What Is A Secured Card?

A secured credit card works much like a standard one, except the customer must submit a security deposit. Cardholders must still make a payment each month, and the will still incur interest if their balance is not paid on time and in full.  From there, the terms can vary widely. For example, many cards offer a credit limit that is only equal to the security deposit, while others allow cardholders to charge more than the deposit received. Most cards have an annual fee, but this amount can vary greatly. Some products even allow their customer’s security deposits to accrue interest.

What Are The Dangers Of A Secured Card?

The idea behind a secured card is sound, but many if not most cards are actually very poor products. While these products are generally available to all applicants regardless of their credit scores, many of them contain such punitive terms and fees that they are barely distinguishable from predatory loans. Applicants should carefully research a credit card to ensure that it does not have excessive application fees, annual fees, or maintenance fees.  Potential cardholders should also steer clear of any product that require additional purchases such as insurance, or has an interest rate in excess of 30%.

Who Is A Secured Card Best For?

Applicants should view these cards as financial instruments designed to help them improve their credit. To this end, the secured cards offered by most reputable banks feature monthly reporting to the three major credit bureaus. Applicants can also view these products as safe methods of payment, since they include all of the legal protections guaranteed to holders of standard credit cards. Some of these cards even include rental car insurance, which is otherwise very expensive for those who do not have coverage. Secured cards are not a good choice for potential cardholders who are viewing these products as a method of finance. These cards have very high interest rates and very low credit lines.

For someone who is building or rebuilding their credit, secured cards offer a golden opportunity to take their first steps towards a brighter financial future.

Editor's Note: This content is not provided by Citi. Any opinions, analyses, reviews or recommendations expressed here are those of the author's alone, and have not been reviewed, approved or otherwise endorsed by the Citi or any of the other companies whose products are featured in this content.

Category: Credit

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