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What Are Secured Credit Cards and How Do They Work?

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If you’re looking for a credit card that comes with a few extra benefits, you may want to consider a secured credit card. Secured cards are designed for people who are rebuilding or establishing their credit history.

They work a little differently than traditional credit cards, so let’s take a closer look at how they work and why they might be a good option for you.

What Are Secured Credit Cards?

A secured credit card is a type of credit card that is backed by a savings account or certificate of deposit. 

The cardholder deposits a certain amount of money into the account to serve as collateral and then charges purchases against the account just like any other credit card. 

The biggest benefit of using a secured credit card is that it can help you improve your credit score.

Your credit score is based on a number of factors, including how often you make your payments and the types of accounts that are associated with your credit file. 

By using a secured card responsibly, you can begin to establish or rebuild your credit history while earning rewards and building a positive relationship with a lender.

Some fees associated with these cards vary from issuer to issuer, but the fees are generally low. Just be sure to read the terms carefully before you sign up for one of these cards.

A secured credit card can also be a great way for young adults who don’t have established credit yet to begin building their history. Many secured cards require applicants to be at least 18 years old.

Benefits of Secured Credit Cards

Secured credit cards offer a few extra benefits for cardholders as well. For instance, these cards help you control your spending because you must have the funds available to pay off your balance every month. 

If you don’t, you could end up paying hefty fees or losing access to your savings altogether if you fail to make a payment.

Another benefit of these cards is that they tend to offer low credit limits, which makes them ideal for people who are building their credit from scratch. 

And since you can make a security deposit instead of having to come up with the full amount right away, secured cards can be easier to get than many other types of credit cards.

How It works?

Secured credit cards work like regular credit cards, but instead of getting money from an account without collateral you can get a secured card and deposit money into it.

When you open a secured credit card, the bank will need to verify that you have enough money to pay for your purchases. When you sign up for the card, they will ask you what amount of money you are going to deposit. 

They will allow you to put anywhere from $100-$10,000 depending upon your credit score and financial situation. You will then need to deposit that money into a separate account so it is not used for any other purpose than the secured credit card. 

Your card will be linked up with this account, so when you make purchases, they draw from your security deposit instead of pulling directly from your checking or savings account.

You can’t spend more than is available in your security deposit, but if you can’t pay for the purchase the bank will allow you to make the minimum payment. There are often no fees associated with making payments on time, though late payments can incur fees.

Your secured credit card term length will be between 6 months and 5 years before it needs to be renewed or you will need to get a new one.

A secured credit card is an excellent way for people with no credit or poor credit history to build up their credit score and re-establish themselves as responsible borrowers. 

A person qualifies for a secured card by making a deposit into an account that serves as collateral; the issuer uses it in case of default. 

Secured credit cards are intended for those with limited or no credit history, but they can be obtained by anyone regardless of age. The biggest benefit of a secured card is that it helps you build strong credit without putting too much strain on your finances.

$10,000 In Savings Are Required For Getting A Secured Credit Card?

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Some secured cards require applicants to have access to at least $10,000 in savings before they are eligible for an account. 

With others, you can make a much smaller deposit. That’s something you’ll want to look into when comparing credit cards. 

However, no matter how much money you put down, you should make sure that the card issuer reports your activity to all three credit bureaus every month. This will help ensure that you build a positive credit history over time.

Secured Cards Pros and Cons

As with any financial transaction, it pays to be well-informed before making any decisions about credit. That’s especially true when you’re interested in applying for a secured card since these products are designed to help rebuild or establish your credit history.

Of course, one of the biggest pros of using a secured card instead of another type of credit card is that you can improve your credit score by making regular on-time payments. That will help you qualify for other types of credit down the road.

With that said, make sure you are aware of any fees associated with your card before you sign up. Some secured cards charge annual fees or monthly maintenance fees that can really add up over time. 

On the plus side, most issuers don’t charge interest rates on these cards as long as you make your payments on time.

If you’re not able to pay off your balance in full each month, however, these cards can end up costing you a great deal of money over time as interest charges continue to grow. 

Make sure that the card issuer is reporting your activity to all three major credit bureaus so that your on-time payments are felt.

Disadvantages of Secured Cards

While secured cards can be beneficial for people who need to establish or rebuild their credit, there are some disadvantages of these products as well. 

Since you’re required to deposit money into your account before opening an account, you could end up losing that money if you don’t use it wisely.

In addition, as with any type of credit card, you will likely have to pay interest on the balance if you carry a balance from month to month. That can be expensive since many secured cards charge high-interest rates.

Also, remember that not all secured cards are alike – some require higher security deposits than others or come with fewer perks. 

For instance, some secured cards don’t allow cardholders to build their credit history by borrowing and then repaying responsibly because they charge extremely high fees or interest rates – making it almost impossible for the consumer to pay off their debt.

Finally, it’s important to remember that secured cards are designed for people with bad or no credit. If you have a good credit history, applying for a new credit card might be a better option for you.

Conclusion

The majority of people who apply for secured cards are those with poor credit history. The primary purpose of these cards is to help you rebuild or establish your credit, which means that the card issuer will report your activity to all three major credit bureaus each month. 

This can be advantageous since it shows lenders that you are responsible and willing to make great financial decisions. When you apply for a secured card, it’s important to keep fees in mind since these products do often charge annual and monthly fees. 

In addition, you’ll want to compare different cards so that you can find one with an affordable interest rate and a security deposit at the level you are comfortable with.

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