How Does A Secured Credit Card Work

Are you currently planning to get a secured type of credit card because you either have a bad credit history or you want to build a credit record?

Surely, what is on your mind right now is - how does a secured credit card work? Let us, first of all, find out the difference between a secured and unsecured credit card.

Difference between a Secured and an Unsecured Credit Card

The regular or unsecured credit card forms most of the credit cards issued today. When you are issued an unsecured credit card, the issuing financial institution did not require any collateral from you. Based on an evaluation of your application and research on your credit score, the credit card company has judged you to be risk free and has therefore decided to take a chance on you.

In the case of secured credit, the credit card issuer requires you to guarantee the credit card, usually in the form of a savings account to serve as your collateral in case of payment default. Your credit card limit would either equal the amount in your savings account or a little bit higher. For example if you deposited $500 you can expect a credit line in the same amount or $750, depending on the policy of the credit card issuer.

How does a secured credit card work in terms of credit card charges? The interest rates may be higher, there may be annual fees, and the other finance charges may be higher - these depend upon the terms of the credit card issuer when it comes to secured credit cards. Because you are considered a risk despite your collateral, the credit card issuer will balance this perceived risk by charging you higher rates and fees. Also, the secured credit card may or may not have a rewards program.

In terms of usage, however, there is no difference between a secured and an unsecured credit card.They don't even look different. You can make purchases anytime and anywhere, even overseas, as long as these are within your credit card limit. Just like in the case of the unsecured credit, you are expected to make timely payments, pay in full to avoid interest or at least pay the minimum amount due but with interest. Most credit card companies report your monthly payment performance to the three credit bureaus, thus affecting your credit score.

Secured Credit Cards are not Debit Cards

How does a secured credit card work in terms of your collateral? Because of the required collateral, most people confuse the secured credit card with a debit card. They are not one and the same. Making a purchase with your debit card automatically and immediately deducts the amount of the purchase from your checking or savings account.

In the case of your unsecured credit card, the amount of your purchase will only be deducted from your collateral savings account if you default on your payment. None of your purchases will be charged to your savings account unless you stop making payments on your outstanding credit card balance.

How does a secured credit card work - it helps you start a credit history or rebuild a damaged credit record. Nevertheless, choose wisely. Do not jump into getting one immediately. Shop around, compare, and get the one that offers you benefits and reasonable fees and charges.


Source: Credit Cards For People With Bad Credit Rating

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