Secured Credit Cards
Secured Credit Cards can be useful to establish a credit history or repair a bad credit history when the usage of the card is reported to the credit reporting agencies - Experian, TransUnion or Equifax. The credit limit on a Secured Credit Card is established by a security deposit instead of the cardholder’s credit history. Understand how Secured Credit Cards are similar, yet different, to more traditional credit cards so that you can chose the card that works best for you.
Similarities and differences with unsecured credit cards
A Secured Credit Card functions in transactions the same as a traditional, unsecured credit card. The cardholder also receives statements and is required to make payments on the purchases made using the credit line. These payments are made with funds outside of those in the security deposit which secures the credit line on the card.
The security deposit serves as an incentive for the cardholder to keep current on their card payments. It also reduces the financial risk to the lender because they have the option to recover delinquent payments from the funds in the cardholder’s security deposit which is held in a special type of savings account.
What determines a Secured Credit Card credit limit
The credit limit for a Secured Credit Card is based upon the amount of a refundable security deposit that placed into an account by the consumer. This is different than a traditional, unsecured credit card where your credit limit is usually based on your credit score and credit report.
Often the credit limit is 50% to 100% of the security deposit, though some card providers will offer credit limits of more than 100% of the security deposit as a promotional incentive. Some card issuers may allow equity in a home to be used as the homeowner’s security for a Secured Credit Card.
Look closely at the cardholder agreement before you apply for a Secured Credit Card so that you understand exactly how its credit limit will be determined.
When the security deposit may be used
If and when a cardholder does not make their regular payments on a Secured Credit Card, the card issuer can choose to use the funds held in the security deposit to cover the defaulted amounts. When this may occur and how the funds in the security deposit savings account are used can vary between cards and card issuers. Usually funds are used from the security deposit only when an account has become severely delinquent (150 days or more) or has been closed by the customer. Read the cardholder agreement very carefully to understand the specifics that you are signing up for when applying for a Secured Credit Card.
Appearing on your credit report
Secured Credit Cards are useful in establishing credit history when they are reported to Experian, TransUnion or Equifax. Make your payments on time and keep your balances low so that the account is in good standing when it is reported to the credit bureaus
If the card issuer will not disclose whether they report on usage of a Secured Credit Card, check your credit report about 3 months after you have started using the card to see if it has appeared. The reporting practices of a card issuer, and the timing of their reports to the credit bureaus in relation to when your first payment on the card is due, will affect how long it takes for a card to first appear on your credit report.
Higher fees are common
A Secured Credit Card is usually more expensive to use than a traditional, unsecured credit card. Because the card issuer is taking on greater risk issuing a card to a consumer with poor or no credit history, the service charges and fees for a Secured Credit Card are often higher than those for most unsecured credit cards. Carefully review the cardholder agreement to understand what fees and service charges may be applicable if you sign-up for a Secured Credit Card.