A secured credit card is different than a traditional credit card. It requires the cardholder to put down a security deposit. The credit limit that the person is given on that secured credit card is then typically determined by the total value of that security deposit.
Here’s how a secured credit card works:
- Paying the Security Deposit: When someone applies for a secured card, the first step is usually paying the aforementioned security deposit. This deposit is collateral against any future borrowing. For instance, if you deposit $1,000, you will have a $1,000 limit.
- Credit Card Use: Once the card is issued, the cardholder can use it for purchases just like a regular credit card. Payments must be made on time, and the cardholder will receive a monthly statement detailing their transactions.
- Building Credit: The main reason for a secured credit card is usually to help the cardholder rebuild their credit history. If they use the card responsibly and make future payments on time, their credit score can increase.
- Refund or Transition: Some secured credit cards may transition to unsecured credit cards, allowing the cardholder to receive their security deposit back. Additionally, some issuers may offer an increase in the credit limit without requiring an additional deposit based on the cardholder’s credit history and payment behavior.
Of course, the exact details of the card are going to be unique to each case. It’s important to look over the details carefully when applying.
Why do people use secured credit cards?
Secured credit cards are often used by those who have a poor credit history – or none at all. They provide an opportunity to build or rebuild creditworthiness through responsible credit management.
For instance, someone who declares bankruptcy is going to see a reduction in their credit score. They’ll want to build that score up, but they won’t qualify for traditional cards for some time following their bankruptcy discharge. A secured card gives them a chance to rebuild that credit score after bankruptcy, which may then lead to car loans, home mortgages and other types of financial options.