Secured Credit Card

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21 Aug, 2024

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A secured credit card is a credit card under which the customer keeps the deposit as collateral with the card issuer in case they default to make the payments. Depending on future payments, these cards are allotted to people with poor or no credit histories and can be converted to non-secured credit cards.

Every time the user withdraws and repays the amount, it gets recorded on the system. Thus, it helps banks track an individual's payment transaction and accordingly assign the credit score, helping people build it. It also enables hassle-free loan-taking from banks or other lending institutions.

Table Of Content

What Is A Secured Credit Card?

A secured credit card is a type of credit card where the cardholder keeps the deposit with the card issuer as collateral if they cannot make payments at the time.
The key advantage of these cards is that they can be converted to unsecured credit cards based on future payments and are offered to persons with bad credit records or no credit histories.
A secured credit card and a student credit card are fundamentally different; the former is designed for people with poor or no credit, while the latter is for college students.

How Does A Secured Credit Card Work?

Secured credit cards are secured by fixed deposits with the financial institution that issues these cards. The deposit is the collateral for the secured credit card banks if the person does not pay the payment on time. Unlike unsecured cards, which do not have any collateral attached to the card issuer, secured cards are considered less risky and have a higher interest rate than secured debit cards.

Usually, the credit card issuer tracks the past transaction history and converts the secured credit card with the regular credit card, thus helping the individual build their credit score. After receiving the credit card, an individual does the normal daily transactions and repays the withdrawal amount in other installments or pays at the end of each month, depending on the terms and conditions of the financial institutions.

Requirements

The requirements to access the card are as follows:

In addition, an individual should have a fixed deposit account with the bank that issues the credit card with recovering the payments in case of default by the borrower.
The documents are essential as income proof before the issuer issues the credit card.
The individual should serve as valid government documents such as a passport, driving license etc., as proof of residence.
Even a person with a poor or no credit history can access the credit card by paying the deposit amount.

Examples

Let us look at the secured credit card examples to understand the concept better:

Example #1

A recent college grad, Catherine has yet to own a credit card. So she applied for a secured credit card to improve her credit score. But, first, she searches for a credit card provider and discovers one with a $700 credit limit.

Catherine completes the paperwork and consents to deposit $700 as a deposit fee. The credit card company reviews and accepts her application. A few days later, Catherine receives her credit card in the mail.

Catherine makes small purchases using her credit card, including food and gas. She adheres to her credit limit and pays her credit card account on time each month. Catherine's credit score dramatically increased after a year of prudent use of her credit card. She applies for a standard, unsecured credit card and is accepted. She received her $700 security deposit refunded after closing her secured credit card account.

In this case, Catherine improved her credit by using her secured credit card, eventually allowing her to be approved for a standard, unsecured card. In addition, she proved to credit agencies that she was a responsible borrower by using her card responsibly and making on-time payments, which helped raise her credit score.

Example #2

Few secured credit card banks are listed by Forbes, which offer great services related to these cards. They also provide additional services such as travel insurance, cashback, and rewards on the usage of credit cards. Some banks that offer secured cards are KOHO prepaid MasterCard, Home trust secured visa card, NEO secure smartcard, Capital One Guaranteed Mastercard, and Plastk secured credit card.

Pros And Cons

The advantages of a secured card are as follows:

These credit cards help build credit scores even if the person has no credit history, and it is difficult for them to get regular credit cards. The eligibility criteria to have such cards are brief and simple.
These credit cards have lesser interest rates because they are backed by collateral in deposits. So, the issuing agency has less risk if the person defaults on the payment.
It helps individuals demonstrate to the credit bureaus that they have the potential to repay their amounts on the due date by depicting that they are responsible borrowers.
Credit cards come with travel insurance benefits, cashback rewards on purchases, and loyalty point that further push people to use these secured cards.

One can summarize the disadvantages of secured cards as follows:

Secured cards have lower credit limits than the usual credit cards if the person has a poor or no credit history.
The person has to pay the deposit to the credit card issuing agency if they default. This leads to a reduced security deposit amount with the bank.
It takes longer to build a credit card score than normal credit cards. Additionally, these cards require a processing fee, maintenance fee, and application processing, which may be time-consuming.

Secured Credit Card vs Student Card

The difference between a secured card and a student card is as follows:

Individuals must deposit with the issuer to qualify for a secured card. The deposit acts as a security when a person stops making payments. People with no credit history or low credit scores frequently use these credit cards since they are easier to approve than regular ones. In contrast, a credit card specifically made for students is known as a student credit card. These cards can be helpful for students to create a credit history even though they usually have smaller credit limits and fewer benefits than standard credit cards.

The main distinction between a secured credit card and a student credit card is that the former is intended for persons with no or bad credit, while the latter is intended for college students.

Frequently Asked Questions (FAQs)

Do secured credit cards help build credit?

Yes, secured credit cards can aid in credit improvement. The credit score may benefit an individual if the credit card is used responsibly by making on-time payments and refraining from exceeding the credit limit. In addition, the credit utilization ratio determines how much credit a person uses about how much credit they have available. Thus, it helps in analyzing the credit score of the person.

Is a secured credit card better than an unsecured one?

It depends on the circumstances of an individual which is better secured or the unsecured credit cards:
- Credit history and credit score: A secured credit card may be more likely to be approved than an unsecured credit card if the applicant has no credit history or a low credit score. It is because secured credit cards demand a deposit, which acts as collateral for the issuer in case the cardholder defaults on payments. On the other hand, unsecured credit cards do not need a deposit. However, if a person has a low credit score, getting authorized for one of the unsecured credit cards may be more challenging.
- Credit limitations: The credit limits on secured credit cards are often smaller than those on unsecured credit cards.

Does a secured credit card improve your credit score?

Yes, cautious use of a secured credit card can improve credit scores. When someone uses a credit card, the issuer reports the payment activity to the credit agencies, which may affect the person's credit score. Their credit score may benefit if they pay their bills on time and keep their balances low. However, it can affect their credit score if they skip payments or use all of their credit limits.