What is a Secured Credit Card?

Secured credit cards are ideal for people with bad, limited, or non-existent credit. For example, people going through difficult financial times and people who are recently divorced may suddenly find themselves with bad credit, whereas people who have just moved to The United States for the first time may find themselves with no credit at all. These situations often make you ineligible for regular “unsecured” credit cards. Even if these people are eligible for unsecured cards, the credit limit is likely to be much lower than they want. This can make rebuilding and establishing credit difficult for people who find themselves in these situations.

Secured credit cards work by using a deposit you make as collateral. You deposit a certain amount of money, and the credit card company uses this as collateral in order to limit your spending. This “deposit account” basically acts as your credit limit. Therefore, the more you deposit, the more you can spend on your secured credit card. The minimum deposit amount is usually around $300, and this can stretch up way into the thousands depending on which credit company you use. With a secured credit card, you will still have to pay your monthly balance, interest rates, annual fees, and application fees, much in the same way that you would with a regular credit card.

Those who wish to rebuild their credit over time will find secured credit cards very useful, as well as those who simply want to establish credit in the first place. Secured credit cards are also useful for those who tend to “live beyond their means”, as they effectively limit your spending to amounts that you can afford. This can make them very useful for people who tend to spend money recklessly and get themselves into financial trouble.

Ultimately, secured credit cards are not a permanent solution. Secured credit cards should essentially be treated as “stepping stones” towards a regular, unsecured credit card. It’s not advisable to use secured credit cards indefinitely, as they tend to have higher interest rates, higher fees, and more stringent rules attached to them. This is because secured credit cardholders have increased risks associated with them in the eyes of the credit card company. After your credit improves over time as you responsibly use your secured credit card, you may once again find yourself eligible for a more typical unsecured credit card.

Most credit unions offer some type of secured credit card option to their customers. As with any type of credit card, it is recommended that you compare the various interest rates and card fees of the various providers in order to find the ones that best suit you. This is especially important with secured credit cards, as you are trying to rebuild your credit reputation; choosing a card whose rates and fees you cannot afford will only exacerbate your credit problems even further.