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How Do Secured Credit Cards Work?
Are you someone who struggles to use a credit card responsibly?
If so, you’re not alone. In fact, the average American household carries $8,640 in credit card debt. And, 55 percent of Americans who have credit cards also have credit card debt.
Many people think the solution to their credit card woes is to just cut up their credit card and stick to debit cards and cash. However, while credit cards can get some people into a lot of trouble, they’re also very beneficial. A credit card is the quickest way to build good credit. But, if you have bad credit, it can be tough for you to get a credit card.
See the problem here?
Luckily, if you have bad credit and you struggle to use credit cards wisely, there’s a solution- switch to a secured credit card.
When used responsibly, a secured credit card can help you rebuild your credit.
But, how do secured credit cards work, exactly?
Check out this guide to learn everything you need to know about secured credit cards.
What’s a Secured Credit Card?
So, first things first, what exactly is a secured credit card?
A secured credit card is a type of credit card for those who have damaged credit or limited credit. This type of credit card requires the user to place a refundable security deposit down when applying for the card. This security deposit acts as collateral until the account is closed. Once cardholders close their secured credit card account, they’ll receive your money back in full.
The reason banks and credit unions require this deposit is so they’re not taking a huge risk when issuing credit cards to inexperienced or previously irresponsible applicants who had trouble with on-time payments. If something goes wrong and the user can’t pay their card off, then the card issuer will just keep the deposit.
Because of this setup, secured credit cards tend to have higher approval ratings than other types of unsecured cards. So, if you’ve been denied a regular credit card and would like to work on building your credit, this is an excellent solution.
Another important thing to know about secured credit cards is that they’re indistinguishable from regular credit cards on your credit report. In other words, nothing will be held against you on your credit score or FICO score for using this type of card.
This means that unlike a debit card or prepaid card, the credit card issuer is able to share your credit activity, such as your monthly payment history, with all of the major credit bureaus (Experian, Equifax, TransUnion), which will help you build credit as long as you pay on the due date each month. Building credit will improve your creditworthiness to allow you to graduate to an unsecured credit card down the line.
Credit building is really the key to secured cards as they allow you eventually increase your available credit with a higher credit line and graduate to cards that offer lower interest charges and don’t have a required security deposit.
It’s also important to note that secured credit cards generally don’t give you the ability to actually borrow money from the issuing institution. Typically, these cards are fully secured, which means that your spending limit won’t exceed the amount you deposit (aka, your credit line). Finding a partially secured credit card offer is actually very rare.
How Do Secured Credit Cards Work?
Secured credit cards (sometimes referred to as prepaid cards) basically work the same way normal credit cards do, with the only unique thing being that you have to pay a security deposit to the financial institution when applying for one.
Typically, the deposit you put down doubles as your spending limit, so this way you’re unable to charge more than you can repay. For example, if you put down a $1000 deposit, your initial credit line on your secured card will be $500.
In this sense, you’re not really borrowing anything with a secured card, as you have the deposit to cover anything you can’t pay. But, this is why the cards are easy for people to use, even those with bad credit.
Here’s a rundown of what it’ll look like when you get a secured credit card:
- You use a balance transfer to place a refundable security deposit down- Some require you to do this when you apply, others have you wait until you’re approved. The typical deposit minimum is $200 to $300
- The amount you deposit then determines your spending limit/line of credit
- The credit card company or major credit bureau holds onto the deposit as collateral
- You make purchases and payments the same as you would with any other card
- Once you close the account, you get your deposit back
Typically, it takes about 12 months of using a secured credit card to graduate to an unsecured credit card.
Our Top Rated Secured Credit Cards
So what are some examples of these secured credit cards? Let’s take a look at some of our top picks:
Citi Secured Mastercard
If you’re looking for a secured credit card with no annual fee and a low deposit, then the Citi Secured Mastercard is an excellent choice.
While this credit card does not offer any rewards, the minimum deposit is just $200. It also comes with extremely high approval ratings.
OpenSky Secured Visa Credit Card
If you’re concerned about being rejected for a credit card due to your poor credit, then this secured credit card is a great alternative. There’s no credit check with this card, so approval isn’t dependent on your credit history.
The main approval requirement is that you have enough income to afford the monthly bill payments and that you can put down a refundable security deposit of $200. It is important to note though that this card comes with a $35 annual fee.
Capital One Secured Mastercard
This card is one of the few partially secured credit cards you can find out there. If you want to build credit at a low cost, the Capital One Secured Mastercard is a great option.
The starting credit limit is $200, the annual fee is $0, and the refundable security deposit is either $49, $99, or $200.
Discover It Secured
Not only does the Discover It Secured credit card come with a $0 annual fee, but it also offers 1 to 2 percent cashback rewards on your purchases, as well as a 0 percent interest rate in the first year.
And, this card will also double the rewards you earn in the first year.
Are You Ready to Try a Secured Credit Card?
Now that you know a bit more about secured credit cards, it’s time to decide if applying for one is right for you. If it is, then we suggest looking further into one of the cards we mentioned above.
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