A secured credit card is offered by a credit card company or bank in exchange for collateral. The average credit card requires an individual to have a satisfactory credit score. A secured credit card is available to people with a poor credit score or no credit history.

Benefits of Secured Credit Cards

Obtaining a secured credit card is a good way for a person to rebuild or build their credit history. However, a secured card is much like a regular credit card in some ways. Secured cards are still subject to annual fees and charges and these charges can sometimes be higher than the average card. Many secured cards offer the borrower the chance to convert to a standard credit card after a period of timely payments has been established.

How Secured Credit Cards Work

A secured card will be issued to the borrower upon payment of an arranged deposit to the credit card company. This acts as reassurance for the lender as well as protection against any unpaid balances. A lender will issue a secured card for anywhere from 50 to 100 percent of the person’s security deposit. Some lenders may also use the deposit for fees associated with the card, such as annual fees, processing fees and application charges. Some companies will offer the lender a small interest payment on their deposit. If you become severely delinquent on your credit card payments, the lender is likely to use your deposit to clear the balance.

Your Credit Rating

Before choosing a secured card it is important you check the card company reports to a credit bureau, as not all lenders do. You should also ask if the fact your card is secured will be added to your report. Some lenders may see you as a security risk because you have a secured card, jeopardizing your chances of obtaining credit in the future. Secured cards tend to have high interest rates, therefore they are best used to make small purchases you can afford to pay off completely.

Unsecured Credit Cards

Once a company sees you are reliable and have been making full payments on time, they may encourage you to switch to an unsecured credit card. Before accepting this offer, check the card’s interest rates, which are bound to be slightly higher due to your circumstances. Remember if the company has decided to offer you a credit card it may be worth shopping around for a better deal.