What Is a Secured Credit Card and How Does One Work?

If you’re working on your credit, a secured credit card can be a valuable tool to help you along the way. Most credit cards are hard to qualify for when you have any issues on your credit history. Secured cards are among the easiest credit cards to get, making them perfect for this situation.

Not everyone understands secured cards, especially since they’re different from a traditional credit card. Keep reading to learn all you need to know about secured credit cards and how to use them.

What is a secured credit card?

A secured credit card is one that requires a refundable security deposit to open. Because the credit card company gets a deposit from the cardholder, it can approve higher-risk applicants.

Secured credit cards are often available to consumers who have no credit history or a low credit score due to previous problems. That means a secured card is a natural choice if you need to build or rebuild your credit score. Another option is a personal loan for bad credit, but that costs you interest, which you can avoid with a secured credit card.

With many secured cards, the amount you deposit is equal to the starting credit limit. These cards usually let you choose between a minimum and maximum deposit amount, such as $200 to $5,000. You can put down a larger deposit if you have the money available and you’d like a higher credit limit.

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There are secured credit cards that can graduate to unsecured cards. Graduation is when the card issuer refunds your deposit because you’ve used your card and paid on time consistently. Not all secured cards offer this, and for the ones that do, the time it takes to graduate varies. If a secured credit card can’t graduate, then you need to close the card in good standing to get your deposit back.

How does a secured credit card work?

When you’re approved for a secured credit card, you need to pay the security deposit. Most card issuers only accept payments by bank transfer. Certain credit card companies also accept other forms of payment, such as a money order.

Besides the security deposit, a secured credit card is exactly like any other credit card. There’s no other difference between how credit cards work if they’re secured or unsecured.

You can use a secured card to make purchases up to the credit limit. Your card’s credit limit is the maximum amount you can spend. It’s better to only use a small portion of the credit limit, though. Using less than 30% of your credit limit keeps your credit utilization low. This is a key part of understanding your credit score so you can get it as high as possible.

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After every statement period, there’s a bill with a payment due date. Pay at least the minimum amount by the due date, and your account will remain in good standing. Keep in mind that it’s better to pay off your full statement balance every time, as this helps you avoid interest on your purchases. You also won’t be stuck paying off debt later.

There are two ways to get your security deposit back with a secured card:

  • Wait for your card to graduate to an unsecured credit card. Only some secured credit cards can do this. The time it takes for this to happen depends on how you use your card and the card issuer’s rules.
  • Close the credit card account in good standing. The drawback is that you can’t continue building your history with the credit card. That’s why when comparing credit cards, it’s preferable to find a secured card that can graduate.

Secured vs. unsecured credit cards

Here’s a breakdown of the differences between secured and unsecured credit cards:

View more information: https://www.fool.com/the-ascent/credit-cards/what-is-secured-credit-card/

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