A secured credit card is a type of credit card that requires the cardholder to make a security deposit, which typically becomes the credit limit for the card. It's often used by individuals who are trying to build or rebuild their credit history. Here's how it works,
Security Deposit
When you apply for a secured credit card, you'll need to provide a security deposit to the credit card issuer. This deposit acts as collateral and protects the issuer in case you fail to make payments.
Credit Limit
The credit limit on a secured credit card is usually equal to or slightly higher than the amount of the security deposit. For example, if you provide a $500 security deposit, your credit limit might be $500 or slightly more.
Card Usage
Once your secured credit card is activated, you can use it to make purchases, just like a traditional credit card. You're expected to make regular payments on your card balance.
Credit Building
One of the primary purposes of a secured credit card is to help individuals establish or rebuild their credit history. By using the card responsibly and making on-time payments, you demonstrate to credit bureaus that you can manage credit responsibly.
Graduation to Unsecured Card
Some secured credit card issuers offer the opportunity to "graduate" to an unsecured credit card after a period of responsible card usage. This typically involves demonstrating a history of on-time payments and responsible credit management.
Fees and Interest Rates
Secured credit cards may have annual fees, application fees, and higher interest rates compared to traditional credit cards. It's essential to read the terms and conditions carefully before applying.
Credit Reporting
To benefit your credit score, the credit card issuer must report your payment history to the major credit bureaus. Make sure the issuer of the secured card reports to these bureaus.
Secured credit cards can be a valuable tool to build credit, but it's crucial to use them responsibly. Make timely payments, keep your credit utilization low, and avoid carrying a high balance to maximize the positive impact on your credit score.
