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what is a secured credit card
16 Jul 2018

What is a Secured Credit Card? A Complete Guide

If you have a hard time getting a credit card due to credit issues, you’ve probably heard people suggest secured credit cards. But what is a secured credit card, exactly?

Secured credit cards are actually very similar to regular credit cards, but there are a few key differences.

So, if you’re looking to build, or rebuild, your credit from the ground up, read on to learn about how secured credit cards can help you do that.

What is a Secured Credit Card?

With a regular credit card, you open up a line of credit with a bank or some other kind of financial institution. You essentially borrow money from that line of credit and pay it back, with or without interest, in monthly installments.

A secured credit card works a lot like that, but with one key difference. You back your line of credit with a cash deposit that you make when you open that account.

If you deposit $300 you have a $300 credit limit. It’s pretty simple.

Creditors prefer this method when you have poor or unestablished credit. It basically eliminates the risk for them, because if you wind up not paying your bill, they just take it out of that deposit that you made.

And if you use your card responsibly and improve your credit, you can eventually earn your deposit back and apply for an unsecured card. Some companies even let you upgrade directly from one to the other.

Depending on the institution you take out a line of credit from, your initial deposit can vary. But most cards require at least a $200 deposit.

Secured vs Regular

Other than the necessary security deposit, secured cards are basically the same as any other credit card. When you make a purchase on a secured credit card, you reduce the credit you have available to you and you need to make your payments every month.

If you make payments late or if you go over your limit, you’ll be hit with a fee. In fact, secured cards come with more of a fee than regular cards do. You will probably have an application fee and an annual fee to pay.

Some cards to look out for are the ones with high interest rates, monthly account fees, and credit limit increase fees.

You Must Make Payments

Even though you backed your line of credit with your own money, you have to pay on time. The point of the card is to get some positive credit heading your way. So if you pay late, it’ll be reported to the credit bureau.

If you default by not paying your payments over a few months, you’ll lose your deposit and your account will close.

The Benefits of a Secured Credit Card

If you have a hard time getting a regular credit card due to poor or unestablished credit, a secured credit card might be right for you. These are much simpler to get than unsecured cards.

It’s a chance for you to prove to the financial institutions that you can use a line of credit with responsibility.

However, it’s not just people with bad credit who benefit from unsecured cards. People with good credit can also increase their max credit limit with a big security deposit. This will also make it easier to get a larger credit limit on a regular card.

Converting Your Secured Credit Card

If the time has come and you’ve improved your credit, you might be able to convert your secured credit card. Some companies will take a look at your account after a specific period, like a year or so, and if you qualify, they’ll upgrade you to an unsecured card.

If you regularly make your payments on time and keep your balance low, you can improve your chances of an upgrade.

If the institution you got your line of credit from doesn’t do the upgrade, you might be able to apply to another credit card with another issuer. After all, that’s why you chose a secured credit card, right? You opened up your options.

Secured Credit vs Prepaid Debit

Secured credit cards might sound a lot like prepaid debit cards. But with prepaid debit cards, you’re just using your money to make purchases and you’re not borrowing money from a financial institution.

These cards don’t extend credit, so they don’t report activity to the credit bureaus, which means you’re not building credit.

Using a Secured Card

When you use your card, only use it sparingly. Make a handful of small purchases per month.

Before your due date, pay your whole balance. This is the only way to avoid paying interest. And check your credit score every once and a while. Once it has improved, ask about upgrading.

When used correctly, a lot of people only require a year of solid effort with a secured credit card to qualify for an unsecured card.

Secured Credit

So, what is a secured credit card? They’re an amazing opportunity for people with low or unestablished credit to change their circumstances. A secured card offers a chance to prove to banks that you’re ready for a card and they help you train yourself to pay your bills on time, every time.

So if it’s time to make a change in your life and you’re looking to improve your credit, consider opening a secured card.

For more information about secured credit cards, or to see how Bonsai can help you, visit us today!