Published on October 30th, 2018 | by Sunit Nandi0
How Secured Credit Cards Work
One of the best things about a secured credit card is the fact you can get one regardless of your credit score. Further, the secured credit card’s limit is whatever you’ll decide it will be. You don’t have to put up with a bank or some other financial institution deciding for you in that regard. Here’s how secured credit cards work.
They’re Just Like Credit Cards—Except
Accepted everywhere any other card with the MasterCard of Visa logo is welcomed, a secured credit card is backed by funds you’ll place with the issuer (your security deposit), to provide them some recourse if you don’t satisfy the terms of the card agreement.
Unlike a debit card, or a prepaid card, secured credit cards are considered actual credit cards. The difference being the credit limit on a secured card is predicated upon the amount you have on deposit—rather than your credit history. Activity surrounding it is also reported to major credit agencies, which makes the secured card an outstanding tool for establishing a credit rating if you have no credit history, or need to rebuild one.
How the Security Deposit Works
While the amount required varies by issuer, in most cases it’s between $200 and $300 with no upper limit. If you’re considering doing this, look for an issuer offering an interest earning account for the deposit.
As long as you pay according to the terms of the card agreement, the money sits undisturbed. The funds will only be attached if the account becomes delinquent.
In many cases, a card issuer will boost your secured card’s credit limit without another cash deposit after you’ve handled your account well over an extended period of time. “Handling it well” means paying your bills on time, keeping your card balances below the credit limit.
Yes, You Can Get Interest Charges
As with a standard credit card, you’ll receive a statement each month detailing your activity. As long as you pay off your purchases before the grace period ends, you’ll live interest free. If you carry a balance over into the next billing period, interest will accrue on the unpaid amount, which will be added to the balance.
You’ll see a minimum payment, just like with a regular credit card. And, like with a regular credit card, that minimum payment will be just enough to cover the outstanding interest while making minor scratch in the principal. By the way, the APR (annual percentage rate of interest) can be higher on a secured card than a traditional one. Issuers consider secured cardholders a greater risk and charge accordingly—even though they already have your cash in hand.
Make it a point to pay the balance in full every time to avoid paying more for your purchases than absolutely necessary.
Fees Are Common Too
Fees are a fact of life with secured credit cards. While you should always review a cardholder agreement carefully to learn what fees and service charges are applicable with any credit card, it’s even more important to do so with a secured card.
Further, secured credit card fees can be higher than with standard credit cards. Issuers reason you either have no credit history or you’re trying to come back from tumultuous one. Either way, even with your cash on deposit, they consider you more of a risk, so they charge you more.
If you’re wondering how secured credit cards work because you’ve found yourself with insurmountable debt, a secured credit card might be your only choice—once you get things straightened out.
To clear those debts, consider working with a partner like Freedom Debt relief. They could get a portion of your unsecured obligations forgiven, which can make paying them off faster. Before you settle on a relief firm though, review some documentation such as these Freedom Debt relief reviews to get some insight into the nature of the organization.