With secured credit cards, the security/collateral given to the bank is cash. If you maintain a minimum deposit in your bank account as security, you can use a secured credit card like a regular credit card. If you delay your payments, the bank can either use your security deposit as payment or levy extra charges. This card can be used as a way to improve your credit score if you do not have a credit score yet or have a bad credit score.
How it works
When you deposit a certain amount in your account, the total credit awarded by the bank is usually the same as your total balance. This means that if you deposit $100 into your account, your total credit limit is $100, allowing you to stay within your means. As long as you deposit your dues into the account in a timely fashion, the bank will continue to offer this plan. If you have successfully proved that you can maintain good credit and manage debt, your bank might even upgrade you to an unsecured credit card that does not depend on your bank balance.
Benefits of secured credit cards
Secured credit cards are an effective way to limit your expenses and give you an opportunity to establish good credit. They are especially useful for those who have no personal loans and tend to spend more than the given limit. The best part about secured credit cards is that almost everybody can qualify for one. Even if you have had bad credit or undergone major financial setbacks in the past due to illnesses, bankruptcy, job loss or divorce, you can apply for a secured credit card and rebuild your credit score.
A few important points to remember
- When you are trying to rebuild your credit score with an unsecured credit card, keep in mind that there are certain companies that are simply looking to make a quick buck. It is best to approach reputed banks even if their fees and interest rates are slightly higher.
- You should also clearly discuss important aspects like interest rates and security deposit to be sure about all the costs involved.