How Do Secured Credit Cards Work?

If you are looking to build up your credit rating, many advisors will recommend a secured credit card as a good place to start. Regardless of whether you are trying to build a credit rating for the first time or recover from a poor rating in the past, secured credit cards may be the answer to your needs.

Secured credit cards allow you to use credit to make purchases and pay bills just like any other credit card. However, in order to qualify for these cards, users are required to provide collateral in the form of security funds. These funds may be equal to or less than your credit limit depending on your creditor and will sit untouched throughout the duration of your credit card use.

If you neglect to make payments on time, your creditor can use these funds to make your minimum payment, protecting them from the risk of allowing unknown or untrusted persons access to credit. However, giving a lump sum to an unknown creditor is risky if you have not done your research. You should ensure that you’re entrusting your information with a trustworthy, established creditor.

The purpose of these cards is to demonstrate that you are able to pay your bills on time. By paying your minimum monthly charge each and every month on time, you will be able to improve your credit rating and, eventually, move on to a more standard credit card.

Benefits

• Build your credit history, or recover from credit rating by making monthly payments
• Does not require being reloaded with money every month like a pre-paid card
• Good account performance may allow you to increase credit limit or remove requirement for security funds
• Gain access to credit even if you do not qualify for standard cards
• Increase your limit easily by increasing security funds

Considerations

When signing up for a secured credit card, there are a few important factors to consider. First, be sure to select a reputable creditor for your secured credit card. This will protect your security funds and ensure that your credit rating rises as it should.

Second, ensure that your chosen creditor is reporting your credit history to the credit bureaus. Some secured credit cards may not be reported or may be flagged as secured cards. These cards will not help in improving your credit rating.

Finally, shop around for a good rate. Many secured credit cards will have higher interest rates than standard credit cards but it is possible to find reasonable rates.