Definition
A secured credit card is a type of credit card designed for individuals with poor credit or no credit history. It requires a cash deposit from the user, which serves as collateral and becomes their line of credit. The deposit reduces the risk for the issuer, making these cards easier to obtain compared to unsecured credit cards.
Key Takeaways
- A Secured Credit Card is a type of credit card that is backed by a cash deposit made by the cardholder. The deposit serves as collateral for the account, minimizing the risk for the card issuer.
- Secured Credit Cards are typically used by people with bad credit or no credit history. The cardholder’s credit limit is usually equal to the amount of their deposit.
- Secured Credit Cards often help build or rebuild credit score. Regular, on-time payments often allow the cardholder to upgrade to an unsecured card over time.
Importance
A Secured Credit Card is an important finance term due to its unique potential to assist individuals in building or improving their credit status. Unlike traditional credit cards, a secured card requires the user to make a cash deposit that acts as collateral and sets the credit limit for the card.
Hence, it is more accessible to those with poor or no credit history. Timely payment and good usage of a secured credit card can help improve one’s credit score over time, thus it plays a critical role in credit rebuilding.
Additionally, in the event of a default, the creditor can recover money by using the deposit, which makes it a lower risk for the issuer. Therefore, understanding the concept of a secured credit card is crucial for financial planning and credit management.
Explanation
A secured credit card is mainly used as a powerful tool for building or rebuilding credit, providing a way for individuals with poor or no credit history to improve their creditworthiness. Often, these cards are the only option for those who are just starting to use credit or who have had financial missteps in the past, making it difficult to be approved for traditional credit cards.
By providing a secured credit route, banks offer these individuals an opportunity to demonstrate responsible credit usage over time, thereby improving their credit score. In terms of its functionality, a secured credit card operates by requiring an initial cash deposit that serves as collateral and typically defines the card’s credit limit.
If a person consistently makes payments on time and uses the card responsibly, their credit score benefits. However, if they fail to make payments, the bank can take the deposited money as payment.
Thus, a secured credit card lowers the risk for the issuer and encourages responsible credit-use habits for the cardholder, thereby accomplishing its main purpose of aiding credit improvement.
Examples of Secured Credit Card
Discover it Secured Credit Card: This is a popular secured credit card that requires a minimum deposit of $The deposit functions as a security for Discover. In case of payment default, Discover can utilize this fund. It is an excellent credit card for those trying to build or rebuild their credit scores. This card also offers a range of benefits including rewards on purchasing gas and at restaurants.
Capital One Secured Mastercard: This card may require a deposit of $49, $99, or $200, depending on your creditworthiness, but in all cases, you get a credit limit of at least $The ability to potentially pay a lower deposit than your credit limit is rare among secured cards and makes this card more attainable for some people.
Bank of America BankAmericard Secured credit card: This card allows applicants to place a deposit of $300-$4,Your initial credit limit is set at the amount of your deposit but could be increased over time without requiring an additional deposit if you manage the card responsibly, demonstrating to the bank that you can handle credit effectively.
FAQ for Secured Credit Card
1. What is a Secured Credit Card?
A secured credit card is a type of credit card that is backed by a cash deposit from the user. This deposit is used as collateral, and the credit limit is typically the same as the deposited amount. It is often used by people looking to build or repair their credit score.
2. How does a Secured Credit Card work?
When you apply for a secured credit card, you need to make a deposit. The bank holds onto this deposit as a safety net against potential missed payments. If you consistently make your payments, your credit limit might increase over time without requiring an additional deposit.
3. Who should use a Secured Credit Card?
Secured credit cards are ideal for individuals with bad credit history or no credit history who are trying to build or rebuild their credit score as they demonstrate financial responsibility over time.
4. Can the deposit be refunded?
Yes, the deposit can be refunded. If you consistently make your payments on time and maintain a good account standing, the issuer may eventually return your deposit while allowing you to continue using the card.
5. Are there any potential downsides to a Secured Credit Card?
While secured credit cards can be a useful tool to build or repair credit, there are some downsides to be aware of. They typically come with higher interest rates and fees, additionally, not all lenders report secured credit cards to the major credit bureaus, which can limit their effectiveness in establishing credit history.
Related Entrepreneurship Terms
- Collateral
- Credit limit
- Security Deposit
- Credit Score
- Default
Sources for More Information
- Bankrate: A comprehensive online finance portal offering data and advice covering many aspects of personal finance, including credit cards.
- NerdWallet: A resource for all things finance, NerdWallet offers user-friendly advice and information about credit cards, including secured ones.
- Experian: As one of the top three credit reporting agencies, Experian’s website offers a broad range of information about credit and financial matters, including secured credit cards.
- Credit Karma: Credit Karma offers free credit scores and reports, and their website provides a wealth of information about credit cards, including secured versions.
