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What Is A Secured Credit Card?

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By: Scam Risk - Expert Reviewer

What Is A Secured Credit Card?

The general idea of what a credit card is and how it works. It allows you to borrow money within a cut-off amount.  Basically, it works like a short-term loan from a credit card company. 

That amount of money needs to be repaid and interest will be charged if you don’t pay your full statement of account on its due date. Aside from the interest, you will also incur interest for late payments. 

If you are a good payer, it will put your credit history in good standing. As you know, a good credit history will come in handy when you need to borrow bigger amounts of money like a mortgage for your new home.

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Now, What Is A Secured Credit Card?

Most credit cards are actually “unsecured.” That means you don’t need to have a security deposit before you are allowed to use it. However, a secured card is set aside for high-risk users and a security deposit is required before the user gets approved. 

Normally, the credit card company will require spot cash that will serve as the credit limit of the borrower. However, using a secured credit card will help the borrower in building good credit as the payments made for secured credit cards are reported to the credit bureaus. 

Also, if your payment record is good, meaning you pay on time and in full, the credit card company may make your credit limit higher or offer you an unsecured credit card with great rewards and easy terms and conditions. 

If you use your secured credit card wisely and dutifully for several months or a couple of years, this will significantly boost your credit history and enhance your credit score. 

Your payment history and utilization of credit are two important elements in securing a favorable credit score. To know your credit utilization, just divide your card balance by its credit limit. 

If you use your secured card moderately and stay away from spending more than your available credit, the lending institutions will regard you as a good and less risky client. 

Your credit score will be enhanced and as a sign of trust, your secured credit card may be likely changed to an unsecured credit card. 

However, more often than not, secured cards do not typically offer any kind of rewards points programs. It is usually for the sole purpose of being a financial aid to help build your good credit standing. Some borrowers who don’t get approved for an unsecured credit card may look into the secured card as a feasible option.

Applying for a secured credit card works the same as applying for a regular credit card. First, you will need to fill out an application form and submit it. The credit card company will then do a background credit check on you. 

However, in applying for a secured credit card, you will be asked to provide your bank account. One of the reasons for this is for processing the refund of your security deposit. 

That amount that you deposit as mentioned earlier will be your credit limit. So, you can start using the secured credit card as you would use a regular one. 

Another difference between a secured credit card and an unsecured credit card is this— in a secured credit card, the borrower is required to present collateral to the credit card company. 

Also, if the borrower neglects to pay his or her monthly account on time, the secured credit card will charge him or her excessively high-interest rates. Just like a secured credit card, these charges as well as the minimum amount due together with the due date will show on the statement of account. 

Should the borrower decide to call off the secured card after a duration of time, his or her deposit will be returned, granting he or she has paid the balance off.

Should you decide to apply for a secured credit card, it’s advisable that you watch out for the unnecessary fees. Remember that most of the secured cards charge zero to very minimal annual fees. 

It’s best to get a secured credit card that only asks for your security deposit, nothing more. However, there are other secured credit cards with very lower annual fees. 

Another thing you need to consider when applying for one is to confirm how much is the security deposit for a credit line. The higher your deposit, the higher your credit limit should be. 

Also, make sure that you get a secured credit card from a bank or a credit card company of good repute. Make sure that the credit card company reports to all credit bureaus. This part is necessary because you want to build a good credit history.

Again, bear in mind to use this secured credit card wisely, don’t spend beyond the limit, and make your payments on time. A secured credit card is one of the best ways to show and build good credit. 

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