Not every individual will qualify for regular unsecured credit cards. Those with bad credit or no financial track record may find that they pose too big a risk to get approval for an account. In some cases secured credit cards may be used as an alternative. What are these products and how do they work?
What is a Secured Credit Card and How Does it Work?
A secured credit card works like any other card. Its difference (and its name) comes from the fact that it can only be taken out if the user places a deposit in an issuer held account to secure their borrowing. The credit limit that comes with the card is usually based on this deposited sum. Generally, the user can charge up to this limit although in some cases their limit may be set lower.
This secured deposit is taken by the card issuer to minimize their risk. If the card user doesn’t make a payment or defaults on their account completely, then the company has the deposited sum to fall back on so they won’t lose any money. This allows them to give out credit cards to people that might not otherwise qualify for them.
Why do People Take Out Secured Credit Cards?
In most cases people take out these cards because they simply cannot qualify for standard credit cards and would prefer to avoid the high interest rates that often come with unsecured bad credit products. With a secured option, the risk posed by a user with no/bad credit is decreased by the security deposit.
Additionally, a secured card can also work as a credit builder over time. Managing a card responsibly can improve or build a credit history so many people will opt for this kind of product and then, hopefully, move on to other products as things improve.
Will a Secured Credit Card Cost More Than an Unsecured Card?
This may look like a good solution on paper for many, but there are cost considerations with this kind of credit card. For example, a user may have to:
- Find the deposit to open the account in the first place which may be hard if cash is tight.
- Pay an annual fee as most card issuers in this sector will charge for card usage.
- Pay other charges such as processing, application and administration costs.
Those interested in these kinds of cards may want to compare terms and consider the pros and cons carefully before choosing a product. Certain costs may be unavoidable here; others are not necessary.
For example, although most cards will come with an annual fee not all come with extra processing and application costs. It may be worth avoiding those that do as these costs may be high. Using an online credit card comparison site may be a quick way of finding a good deal.
The banks and card issuers that offer these products may be used to dealing with people with financial issues but this doesn’t mean that they will allow everybody to open an account. Those that have difficulty getting a secured credit card or those that would prefer an alternative solution may need to look at other options such as unsecured bad credit cards and prepaid cards.
Carol Finch - Carol Finch is the Topic Editor for Retirement Planning, Budgeting, E-Commerce & Technical/Business Writing on Suite101.
Join the Conversation