What is a guarantee card?

Definition of Secured Card and an Example

How Secured Cards Work

Advantages and Disadvantages of Secured Cards

How to Obtain a Secured Card

Definition of Secured Card and an Example

A secured card is a credit card that requires you to make a deposit before you can access a credit limit. If you have poor credit or no credit history and need a credit card, you may want to consider obtaining a secured credit card, especially if you are not eligible for an unsecured credit card. Learn more about how they work, the advantages and disadvantages, and what to look for when choosing a card issuer.

How Secured Cards Work

Card issuers require deposits as collateral for your credit limit so they can cover their losses if you do not pay as agreed. It is a way to reduce the risk of lending to someone with insufficient or unsatisfactory credit history.

For example, suppose a person has just turned 18 and has no credit history. They are willing to start using a credit card to make purchases more convenient, so they apply for an unsecured card. However, due to the lack of their credit history, they are denied. In this hypothetical scenario, this person could benefit from applying for a secured card.

Borrowers can use secured credit cards to improve their credit scores and credit history until they can qualify for unsecured cards and other financial products in the future. To do this, they need to prove their ability to make the minimum payments regularly and on time. To use a secured credit card to improve your credit, be sure to use a card that reports to the three major credit bureaus: Equifax, TransUnion, and Experian.

Your credit limit is often equal to your deposit. However, some card issuers offer a higher credit limit than your deposit, meaning that the card is partially secured.

Advantages and Disadvantages of Secured Cards

A secured card can be a first step to help you build good credit, but it has disadvantages that you should consider. Here are some advantages and disadvantages you should know.

Advantages:

• Easy Approval: Lenders are more likely to approve cards for people who have no credit history or have poor credit because securing the card with a deposit reduces risk.
• Helps Build Credit: Secured card issuers often report to the three major credit bureaus, allowing you to build your credit if you pay on time.
• Deposit Refund: Card issuers often refund your deposit if you pay on time or when you close and pay off your account.
• Opportunity for Unsecured Credit Limit: Some companies may increase your credit limit and upgrade you to an unsecured account if you demonstrate responsible use.
• Rewards: You may be able to earn rewards such as cash back, depending on the terms of the credit card.

Disadvantages:

• Requirements: Secured cards require an upfront deposit, which helps reduce risk for the lender.
• Low Credit Limits: Secured cards often come with relatively low credit limits based on the amount of the deposit you provide.
• Higher Interest Rates and Fees: They may include higher fees and interest rates because borrowers tend to be more risky.
• Lower Rewards: In general, rewards are not as high for secured credit cards as you might find with unsecured cards.

Although secured cards often do not offer the most attractive rates, terms, and rewards, they can be a good starting point if you are unable to get an unsecured card yet. You can use them to build a positive credit history and work towards qualifying for better credit cards in the future.

How to

Getting a Secured Credit Card

If a secured credit card is right for you, look for the best secured card for your needs. Key factors to consider when comparing cards include:

• Deposit Amount and Credit Limit: Look for a deposit amount that fits your budget while giving you the highest credit limit for your money.
• Annual Fees: Compare credit card fees and aim to get a card with no fees or low fees.
• Annual Percentage Rate (APR): Review the annual percentage rates as they will apply to any balances you carry month to month.
• Refundable Deposits: Ensure that your deposits are refundable, either before closing your account or at the time of closing.
• Unsecured Credit Limit Upgrades: To improve your credit history, look for card companies that evaluate your account regularly for credit limit increases.
• Other Fees (Foreign Transactions, Replacement Card, Balance Transfer, etc.): Understand all the various fees that the credit card could incur.
• Rewards Programs for Your Spending: Some cards reward you for using the card with cash back or points. The more rewards you earn, the greater the value you can get from the credit card.
• Cardholder Reviews: Check what other cardholders say about the card and their experiences with the company. Look for positive ratings.

Once you find a card with a competitive comprehensive offer, you can apply as you would for any credit card, usually through an easy online process. Once approved, you’ll pay the deposit and receive your new card in the mail.

Takeaway

Secured cards are credit cards that require a deposit before you can obtain a credit limit. The deposit acts as collateral for the credit limit to reduce the risk to the issuer. Secured cards are a good way to build credit if you do not have a credit history or have bad credit. Be sure to compare secured cards and compare terms and conditions to find the right card for you.

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Sources:

Consumer Financial Protection Bureau. “Building Credit From Scratch.” Accessed Dec. 9, 2021.

Capital One. “Build Credit with a Secured Credit Card.” Accessed Dec. 9, 2021.

Source: https://www.thebalancemoney.com/what-is-a-secured-card-5212453

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