6 Things You Need to Know About Secured Credit Cards

Whether you're rebuilding credit after a financial setback or it's your first time applying for a credit card, it can be difficult to get approved. Without a credit card, simple tasks such as renting a car or reserving a hotel room become more complicated. It seems like a catch-22 – it can be hard to get approved without a solid borrowing history, but unless a card issuer gives you a chance, how are you supposed to build credit?

Applying for a secured credit card may help. With responsible use, a secured credit card may help you establish a stronger credit history, and build your reputation as a borrower who may be a suitable candidate for other types of loans.

1. What is a secured credit card?

A bank that offers a secured credit card requires the applicant to make a cash deposit before it will open the credit card account. This cash deposit is called collateral. If the cardholder uses the credit card but doesn't make the payments as promised, then the card issuer can keep the cash deposit. This arrangement protects the card issuer from default. But if the cardholder makes payments as promised and otherwise abides by the cardholder agreement, then the card issuer may report those timely payments to the credit bureaus. That can help a new or troubled cardholder build a stronger credit history.

Getting a secured credit card may be a smart and strategic choice for those who want to rebuild their credit following a financial difficulty, such as a bankruptcy or foreclosure. But because secured credit cards may also help borrowers with limited credit histories, they may also be suitable for recent college graduates, new citizens, and others who have never been approved for a loan. Read How to Help Build Credit and 6 Steps to Help Build Credit When You're New to the U.S. for more information.

2. What is an unsecured credit card?

An unsecured credit card does not require the cardholder to give the card issuer a cash deposit. For this reason, unsecured credit card issuers are more selective during the application process, and it can be more difficult for an aspiring cardholder to get approved. That's because card issuers prefer applicants who have established a credit history of repaying loans on time and as promised.

3. What is the difference between secured and unsecured credit cards?

Aside from the cash deposit, secured and unsecured credit cards work in similar ways. A cardholder can spend up to the credit limit established by the card issuer, provided the cardholder makes regular, on-time payments and abides by other cardholder agreement terms. Secured and unsecured cardholders can also use their credit cards anywhere that accepts them, provided they don't spend over their personal credit limit.

Cardholder terms vary widely between all types of credit cards, whether secured or unsecured. For example, cardholders often pay different interest rates. Some cardholders have higher credit limits than others. And some cardholders can take advantage of special promotions or rewards programs offered only by their card issuer.

4. How much is the deposit for a secured credit card?

How much of a deposit is required depends on a wide variety of factors, but banks that offer secured credit cards can require collateral ranging from $300 to $5,000. In many cases, the size of the deposit is equal to the size of the credit limit. That means an applicant who is granted a $500 secured credit card limit may need to give the credit card issuer $500 in cash, up front, as collateral.

If the secured cardholder abides by the terms of the cardholder agreement and establishes a responsible borrowing history, the card issuer might offer the cardholder the opportunity to apply for an unsecured credit card. If this occurs and the cardholder accepts the terms of the new unsecured credit card agreement, then the card issuer may return the security deposit to the cardholder.

5. When would a secured credit card make sense for me?

If you have experienced financial difficulties that make getting an unsecured credit card difficult, or if you're just starting out in the world of credit and have never had a credit card or loan before, then a secured credit card may make sense. Before applying, consider the card's terms and conditions carefully.

6. How can a secured credit card help rebuild my credit history?

Regular, on-time payments play an important role in maintaining credit health. Therefore, a secured credit cardholder who establishes a pattern of making regular, on-time payments can help build – or rebuild – credit history. Other factors also play a part in in building credit, so make sure you understand how credit works before applying. Read 9 Steps to Help Build Credit Health After a Setback for more information.

Finally, as you consider a secured credit card, verify that the card issuer reports your activity to the credit bureaus. Card issuers that report to credit bureaus give you the best opportunity to establish or rebuild your credit history.

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