How Secured Credit Cards Work

by Jake Ross

When you’re unable to get a credit card, that’s when you realize how much of a convenience it is. It’s not even about the “credit” part, it’s the fact that as a payment option, it makes things so much simpler. You don’t have to walk around with a wad of cash, which is very unsafe. You also don’t have to take the time to write checks to make your payments.

If you need help organizing your finances because you have no idea where your money goes, paying with plastic can actually help you because if automatically keeps a record of your purchases. When it’s time for you to make a budget or tweak your existing one, this trail can be very useful. As you can see, using credit cards DOES have some pluses, and they can even help you provided that you’re careful enough. If you take the an extra step and get yourself a secured credit card, then you can effectively get the best of both worlds.

There’s no need for you to concern yourself over whether or not it’s going to be obvious to other people that you’re using a secured credit card. They won’t know, because a secured credit card looks and works exactly the same as an unsecured one, right down to bearing the logo of any one of the big credit card companies like Visa, MasterCard, American Express, and Discover. The big difference is what you have to do to get it. This is the deal:

What you have to do is go open a savings account where you will put a few hundred dollars, with the understanding that you’re giving the company that’s going to issue your card the right to take that money if you don’t make your payments. For this to be possible, you “pledge” the money to them, agreeing to put it up as the collateral for your secured credit card.

In most cases, the money that you deposit as a collateral will generate interest, just as any other savings account. Furthermore, many secured card issuers will reconsider your case after a certain amount of time, usually a year. At that time, if your account shows a track record of timely payments and no exceeding of your limit, your account may be upgraded to unsecured status, which means that your credit card will no longer be tied to your deposit, and said deposit will be available for you to use.

If you want to exercise control of your credit limit, a secured credit card is a great way to do so: you can increase or decrease your credit limit by adding money to or withdrawing money from your collateral account. And you have less stress when it comes to your monthly payments because the worst case scenario is that you just use your collateral to pay off your balance and if there’s any money left over, it’s available for you to use as you like.

Of course, you will have to cough up some fees, no matter what issuer you do business with to get your secured card, and that’s why doing some comparison shopping is highly recommended. You will have a good chance of finding a better deal, as issuers (especially online ones) often offer perks so that they can get more customers.

Finally, do make sure that you get a secured credit card, and not a prepaid credit card. The difference is that issuers of prepaid credit cards don’t bill you on a monthly basis. So they don’t report to the credit bureaus, and since what you’re trying to do is improve your credit, they would be of no help in that particular situation.

About the Author:
Jake Ross is a credit repair specialist and regularly contributes to several personal finance blogs, answering questions on the best secured cards for building credit and what are good credit repair companies.
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April 22, 2009 | Filed Under Credit Cards

 

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