Common Questions About Secured Credit Cards

You may have heard the term secured credit card and not known what it meant. Is it a regular credit card, a store credit card, or a special credit card? If you’ve ever wondered what a secured credit card is or why anyone needs one, read on. This article will explain all you need to know about secured credit cards.

Q: What is a secured credit card?

A: A secured credit card is a card that issues a line of credit to the cardholder based on a collateral deposit. To open a secured card, the applicant must deposit anywhere between $200 and $2,000. That money is held by the bank, which issues a line of credit equal to the deposit. This way, if the customer defaults on the debt, the bank is protected. An unsecured credit card, works without this deposit—therefore the loan is unsecured.

Q: Why do people apply for secured credit cards?

The reason people get secured credit cards is because their credit is damaged or they don’t have a credit history. In order to be approved for an unsecured credit card—or a traditional credit card—an applicant must have good enough credit for the particular card. Although there are lots of cards on the market for people with limited credit, sometimes people cannot get approved for any type of unsecured credit card. In this case, a secured credit card is an option.

Q: Can secured credit cards be used like regular credit cards?

A: Yes, secured credit cards work like other types of credit cards. They are issued by networks like MasterCard, Visa and are accepted anywhere that accepts payment by those networks. The balance is due at the end of the billing cycle and must be paid by the due date, or interest will be applied. Even though the cardholder has paid the deposit to the bank that issued the card, late fees and interest still accrue if purchases are not paid off in full by the payment due date.

Q: What types of fees are there for secured credit cards?

A: Secured credit cards are notorious for charging fees—and sometimes very high ones. If you are in the market for one, be on the lookout for high fees and try to find a card that does not charge a startup fee or an annual fee. Secured cards may have high APRs, but paying the balance in full before the due date will prevent interest from piling up.

Q: Is there an alternative to getting a secured credit card?

A: If your credit is such that you cannot get an unsecured card, but you do not want to pay the deposit to get a secured credit card, you do have other options. You can get a prepaid debit card instead. With this type of card, you also put money down up front. The difference is, when you use the card, you are actually using your own money. The drawback to a prepaid debit card for some people is that it will not report to credit bureaus and help improve your credit. If that is your goal, make sure to get a secured card that reports to a major credit card bureau.