What is A Secured Credit Card? How Does It Work?

Secured Credit Card: Top Features

Here is what you need to know about a secured credit card:

1. Backed by Collateral/Deposit

Unlike a normal credit card, a secured credit card is supported by a deposit or collateral. The lender uses the same when the cardholder doesn’t make card payments on time.

2. Eligibility

All credit card companies have their eligibility criteria for secured credit cards. The eligibility criteria for secured credit cards are far more relaxed than unsecured credit cards. The issuer provides a secured credit card in return for a fixed deposit. This secures the credit card company because the bank can use the cardholder’s fixed deposit money and mitigate losses in the case of credit card bill default.

3. Interest on Collateral

Another thing you must know is that the security or fixed deposit against which the cardholder receives the secured credit card earns interest till maturity.

4. Boosts Credit Score

The credit bureaus also consider using secured credit cards when calculating the credit score. Responsible usage of secured credit cards can help users boost their credit scores. People with nil or low credit scores can get secured credit cards and start building their credit.

5. Credit Limit

The secured credit card limit depends on the security/fixed deposit value. The credit limit usually equals the deposit amount, and the cardholder cannot exceed the credit limit.

How does a Secured Credit Card Work?

When you apply for a secured credit card, firstly you must make a cash deposit payment or open a fixed deposit with the issuer. The amount of the deposit varies with the company. This deposit works as collateral against the credit limit, which is kept equal to the amount deposited.

After making the deposit, you receive a secured credit card. You can use the same as any other credit card to do shopping, pay bills, etc. The secured credit card also allows you to save money by providing attractive deals and discounts, a chance to earn reward points, and many other benefits.

However, it is critical to ensure timely payment on the card. Failing which, the issuer can use the deposit amount and recoup the losses. This will also lower your credit bureau score.