Credit Cards

What is a secured credit card?

A secured credit card is often a valuable resource for those individuals that are suffering from poor or no credit and are having trouble finding the right card. A secured credit card is one where an individual’s savings account acts as a sort of collateral for the issuer. The secured credit card is thus backed up by that savings account.

Most credit cards are unsecured, thus the issuer relies on checking applicants’ credit history and current income information to decide whether to extend them a line of credit or not. Thus people with good or excellent credit qualify easily for low interest rates. While there are cards especially targeted to individuals with poor or no credit history, they tend to have a higher interest rate.

A secured credit card may be the only option for some people with a poor credit history. Since the card is backed by a savings account, there is less risk for the issuer and it is easier to qualify for the card. A secured card has a maximum credit limit set equal to or as a percentage of the amount in the savings account. Before applying for a secured card, be sure to look at the minimum amount you must maintain in your account to be eligible for the card.

So what are the benefits of a secured credit card? Some benefits are similar to regular credit cards such as you do not have to carry cash around and can purchase items online and be able to pay in a convenient manner.

More specifically a secured credit card can help you improve your credit history. If you got a secured card because you were ineligible for an unsecured one, improving your credit history will be important. If you maintain a regular payment record, it will reflect positively on your credit report and improve your credit score. Some creditors however may disregard your secured credit card transactions on your credit report.

Not all things are rosy for a secured credit card. The obvious drawback is that you are limited to taking out money to the amount you have in the bank. Even though it is backed by a savings account, a secured credit card will often have a higher interest rate than an unsecured credit card.

Large glass buildings - one of them labeled "Bank"

Even though the secured credit card is backed by your bank account this does not mean that your balance will automatically be paid through your saved money. If you carry over a balance, an interest rate will be charged. The savings account is only used as a last resort. Therefore you can end up further ruining your credit even with a secured credit card if you are not careful.