How Secured Credit Cards Work

With but few exceptions, you’ll need some sort of a credit card to function in today’s society. Whether it’s to rent a car, reserve a room in a hotel or make online purchases, you’re going to have a tough time if you don’t have a credit card.

But what can you do if you have no credit history?

Going with a secured card might well be the solution to your conundrum. They do everything regular credit cards do, and you can get one with no track record.

Here’s how secured credit cards work.

What’s a Secured Credit Card?

Backed by your cash deposit, a secured credit card comes with a limit equal to the amount of your deposit. In other words, they’ll give you a card with a $500 limit if you give them $500 to hold in exchange for the credit card.

You’ll get regular credit card bills and the terms applied to standard cards — including grace periods and interest charges — will be observed. If you default on the balance due, the issuer keeps the deposit and walks away.

Basically, it’s a credit card with training wheels. As these Freedom Debt Relief reviews illustrate, it’s easy to get in over your head with traditional credit card debt — especially if you have cards with limits in the thousands of dollars. Secured credit cards take away the possibility of getting into this situation.

What Happens to the Security Deposit?

While most issuers match the deposit dollar for dollar when establishing a limit, some will allow charges of up to $200 with a $49 to $99 dollar deposit if you have a rudimentary history on file.

Your deposit will be refunded to you after a certain amount of time if you spend reasonably (keep the balance below 30 percent of your limit) and make all of your payments on time. The exact interval varies by card issuer.

However, it’s important to understand using your security deposit to pay your monthly bill is not permitted. If it comes down to the need to do that, your deposit will be used to pay the card off in full, your account will be closed and a default could be logged on your credit report.

How a Secured Credit Card Helps You Build Credit

Issuers know your principal aim is to establish a credit history. With this in mind, they’ll report your activities to Experian, Equifax and TransUnion, the three main credit-reporting bureaus in the U.S.

A numerical ranking between 300 and 850 will be generated by which lenders can gauge your creditworthiness based upon the information reported. The higher the number, the less of a risk lending to you is perceived to be. Responsibly using secured credit cards can help you build up a solid rating.

How Long Should You Keep a Secured Card?

Some issuers automatically transition customers to regular cards after a prescribed period of exemplary usage. The timing varies from company to company. Ask how that’s handled before you apply for a card and submit the deposit.

In some cases, it may be advantageous to keep the secured card even as you get a traditional one. If the account number changes when you make the transition, you might lose credit for all of the good behavior you demonstrated with the secured card and your credit score could drop.

This is because one of the criteria by which scores are generated is the age of the account. The older the account is with a good history of usage and payment, the better it looks on your credit report. This is another thing about which you should ask before applying so you can plan accordingly. Understanding how secured credit cards work and using them to your best advantage is a great way to springboard yourself into a positive credit history.