How Secured Credit Cards Work
If you have a spotty credit history, obtaining approval for a traditional credit card can be difficult. Financial institutions lend money cautiously, and they try to identify applicants who will not pose risks. Your financial issues are in the past, though. You have the ability to repay a loan reliably — you just need a lender to give you an opportunity to begin rebuilding your credit.
Secured credit cards exist to help people rebuild their credit. Often, a person who cannot obtain approval for a traditional credit card can receive a secured credit card. To receive a secured credit card, you’ll need to provide collateral to a financial institution. You’ll then borrow against that collateral while your secured credit card account remains open.
How Secured Credit Cards Work
To obtain a secured credit card, the institution offering the card will ask you to provide a deposit. In most cases, the deposit is approximately $300. The issuer will then give you a credit card. Usually, a secured credit card has a limit equal to the amount of the deposit. If your credit rating is fair, though, your credit limit may be slightly higher.
When you use a secured credit card, your deposit acts as collateral to guarantee that you’ll repay any money you borrow. As long as you abide by the terms of the card agreement, the deposit remains yours. If you fail to repay the money you borrow, though, the financial institution may use the deposit to recover the unpaid portion of the loan.
Most institutions that offer secured credit cards check applicants’ credit. If your credit history is very poor, there is a chance that you will not receive approval for a secured credit card — even though secured credit card users borrow against their own money. Take a look at the best unsecured credit cards for bad credit too.
Getting Your Deposit Back
As long as you have a secured credit card, your highest priority should be to make payments on time each month according to the cardholder’s agreement. As long as you do so, the bank that issued the card to you has no claim on your deposit. You can get it back in two ways:
- You can close your account in good standing after repaying the card’s full balance
- You can upgrade the card to an unsecured credit card
Most institutions that issue secured credit cards review cardholders’ accounts yearly. If you have consistently made payments on time — and you have made sound financial decisions in other areas of your life — the institution may determine that you qualify for an upgrade to an unsecured credit card. If you receive an unsecured credit card, the institution will return your deposit after reconciling any outstanding balance on the secured credit card. Take a look at the best secured credit cards.
Some institutions refund security deposits in the form of statement credits. If your credit card provider refunds your deposit as a statement credit, your new unsecured credit card will initially have a negative balance. You’ll have the ability to spend the negative balance on your unsecured credit card without repaying it until your balance becomes positive.
Financial Advisor - MoneyBeagle.com
David is our in-house financial advisor with years of experience in the credit card industry. He became interested in credit cards after working for several years at a major bank. He holds a Masters Degree in Finance.