What is a secured credit card?

To improve your credit history and boost your credit score, it is recommended that you obtain a secured credit card and use it responsibly for several months or a couple of years.

secured credit card
Don't have a good credit score? Unable to get the money for a loan? Here's how you can restore your credit score using a secured credit card.

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Having a good credit history is important if you are planning to apply for a school loan, buy a house, or lease a car. There’s still hope for those with bad credit or limited credit. You can build or restore your credit score by applying for a secured credit card.

Secured credit card vs traditional credit cards

There are many similarities between secured credit cards and traditional credit cards. A secured card differs from a regular credit card in that you pay a cash deposit upfront to establish your credit line. Secured cards require a security deposit in order to be approved, even if credit history is used to determine eligibility. If you miss a payment, the bank will use this security deposit to cover any purchases made by you. A secured credit card is just as important as a traditional credit card for making your monthly payments on time. It is important to remember that if you default on your payments, your deposit may be retained by the card issuer.

Credit cards issued as a result of secured lending are often used by subprime borrowers or those with little or no credit history. In addition to helping borrowers improve their credit scores, secured credit cards are reported to credit reporting agencies.

What exactly do they do

There are high chances that you will not be able to pay off your accrued balance. Your accrued balance is the money you owe to the credit card company if you have an unsecured credit card. As part of your contract, you agree to pay your balance monthly in whole or in part, but you don’t put up any assets or income to support that promise. To compensate for the lack of collateral, credit card interest rates are always higher than secured debt, such as mortgages and car loans.

How to apply for a secured credit card

An application must be filled out and handed in, just like any other credit card application. A credit check will then be conducted by the lender. Secured credit cards require your bank account and routing number to process a refundable security deposit. However, unsecured cards do not need them. Deposits become credit limits – the maximum charges you can make on the card.

Secured credit cards operate just like any other credit card once your security deposit has been accepted. Pay off your secured card balance for the entirety of every month to avoid exorbitant interest charges. This is because secured cards are generally aimed at people with poor credit.

You will see your charges and balance due for that month on your statement, just as you would for unsecured cards. However, the deposit does not cover the monthly charges you make to the card. Your deposit may be refunded if you decide to cancel the card after paying off the balance for a while.

How this card can improve your credit

To improve your credit history and boost your credit score, it is recommended that you obtain a secured credit card. Use it responsibly for several months or a couple of years. Credit bureaus will receive your account history when you use a secured credit card instead of a prepaid credit card. Your credit score will gradually improve if you use a secured card.

You may even be able to upgrade to an unsecured card (in which case, you will receive your deposit back) if you maintain positive payment history. The best way to keep a positive record is to pay off debts each month in full and on time. Your credit score will suffer if you miss payments because lenders report delinquencies to credit reporting agencies.

Conclusion

However, you should be aware that improving your credit score in this manner may do more harm than good. This is if you are unable to make your payments on time. Despite consumers obtaining secured credit cards to improve their credit, delinquencies can negatively affect their credit scores. 

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This page is purely informational. Line does not provide financial, legal or accounting advice. This article has been prepared for informational purposes only. It is not intended to provide financial, legal or accounting advice and should not be relied on for the same. Please consult your own financial, legal and accounting advisors before engaging in any transactions.

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