What is a ‘Secured Credit Card’?
If you have a poor credit rating, for whatever reason, you are likely find it difficult to obtain a credit card. That’s where secure credit cards come in.
A cash collateral deposit is a requirement for secure credit cards. Where the provider permits you a spend of up to a certain limit of their funds per month, secured credit cards need you to deposit some of the money individually, unlike a traditional credit account. Confused? Don’t be – here’s how it works.
With a secure credit card arrangement, the debtor – which is yourself – pays in funds on deposit with the financial institution or bank issuing the card.
The lender then lets you to make credit card acquisitions, up to a value of 90%-150% of the amount you’ve allocated on deposit. That percentage will be dependent on your arrangement with the bank and your individual circumstances. For example, if you’re arrangement allows 120% credit, and you’ve allocated 500 on deposit, you’ll have access to 600 on your credit card.
While secure credit cards are often the only choice available to consumers with a bad credit history, they’re also often the only option for those who are new to credit, such as university students and teenagers. Without a credit history, banks can be nervous about extending even small-scale credit facilities to you.
Thus, the purpose that secure credit cards serve is to enable people with poor or non-existent credit histories to use a credit card, and establish a fresh pattern of repayment and spending habits. Meanwhile, the bank feels that the risk of taking on a poor-credit customer is balanced out, as they have a cash deposit they have on file, which can be tapped into to repay the credit card debt if necessary.
Usually, that cash deposit must not to be withdrawn while you have a secured credit card account. You will earn interest on the account – generally, the interest rate is on-par with what you would earn on an ordinary savings account with your bank – but you’ll need to speak with your lender about specific rules regarding adding and withdrawing from the savings account. You should also ask how long your money is required to remain on deposit once you close the account, as some lenders may elect to hold the deposit for an extra month or two, to cover any late transactions and charges.
There are many lenders on the market who are willing and able to offer secure credit cards, but it absolutely pays to shop around. Charges, fees and restrictions vary dramatically, including interest rates, annual fees, mandatory card insurance costs and application fees, so don’t forget to read the fine print!
