A secured credit card is an alternative to a traditional credit card that makes it easier for people with bad credit or no credit history to improve their credit score. Unlike a traditional credit card, a secured credit card requires a deposit to open the account. For many, secured credit cards are the first step in taking control of their credit journey. They are an important resource for people who do not have extensive credit histories or who need a second chance with their finances. Sounds like the right credit card for you?
Read on to learn how a secured credit card works, how to get a secured credit card, and how it differs from unsecured credit cards.
What is a secured credit card?
A secured credit card is a card that requires you to place a cash deposit as security when you open an account. The deposit is an insurance policy for the credit card company in case you cannot make your payments or stop paying your balance. If you are responsible with your secured credit, you can expect your credit score to increase.
Your secured credit card issuer may allow you to upgrade to an unsecured credit card; If not, you can apply for a credit card elsewhere once your credit is strong enough. Typical characteristics of a good secured credit card are a low minimum deposit and availability for borrowers with bad credit.
Secured Credit Card: Low Deposit
The initial deposit amount for a secured credit card varies by card issuer. Usually the deposit is equal to your credit limit on that card.
For example, if you open a secured credit card account with a $800 deposit, your credit limit is also $800.
Secured credit card: Bad credit
Depositing with bad credit reduces the risk for the credit card company, which means the issuer can take your deposit funds to get your money back if you don't pay your bill. This is a major reason why secured credit cards are available for people with bad credit or no credit. Borrowers with poor credit ratings often cannot be approved for other types of credit cards.
How to Get a Secured Credit Card
The first step in getting a secured credit card is to find the best card option for your finances. Once you've selected a card, fill out and submit an application. The secured credit card application process requires your personal information, including bank account information, which can be linked to the card. Once approved, the issuer will instruct you on how to deposit your collateral.
The main difference from a secured credit card application is that your bank account and sort code is required to process the deposit.
Once the issuer has received and processed your deposit, you will receive your new credit card in the mail, ready to use. Because secured cards require collateral from borrowers as part of their agreement, paying off your balance in full each month is good practice to avoid being charged heavily on interest or losing that deposit entirely.
How does a secured credit card work?
A secured credit card can be a valuable tool in building your creditworthiness if you spend responsibly and stay on top of payments with.
Here's how it works: Cardholders make an initial deposit, then use their secured credit card for everyday purchases and monthly bills without exceeding their credit limit (usually equal to the amount of the deposit).
Most creditors report these payments to the credit bureaus on time, which can help improve a cardholder's score. That's why it's important to pay for your secured card in full and on time every month.
Finally, with sufficient responsible use, the cardholder can switch to an unsecured credit card. Here are some tips for using a secured credit card effectively:
Spend wisely
Only use the card for essential expenses, ideally only if you already have money in a checking or savings account to pay for. This is the best practice for an unsecured credit card: spend only what you can afford each month.
Pay
Pay your remaining balance in full each month before the due date. You will not be charged any interest on full payment. Interest rates on secured cards are often higher than on unsecured cards.
Monitor your score
Monitor your credit history over time. Get even more points. If the issuer doesn't approve you for an unsecured credit card, research other lenders and consider applying if you have a good chance of approval.
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