Broadly there are two types of credit cards: secured and unsecured. What is a secured credit card and how is it different?
The best secured credit card offers many of the benefits and protections of a standard credit card. The only difference is you have to put down a security deposit first. The security deposit works as a collateral for the issuer in case you default on payments.
If you have poor credit or a limited credit history, lenders have no guarantee of you being a responsible borrower. Putting down a security deposit gives your lender some protection in case you default on your credit obligations.
However, if you manage your line of credit responsibly, you do not have to worry as you will get your security deposit refunded in full. With a secured card, the amount of your deposit will be equivalent to the line of credit you get entitled to.
Since secured cards are often for people with fair to average credit, they are likely to come with high APRs. So make sure to pay off all your dues every month to avoid exorbitant interest charges.
The many benefits of a secured card
Secured credit cards are one of the best options for youngsters or anyone who is new to savings or building credit. You can use a secured card to help you establish good credit and an impressive credit score, as long as you practice responsible credit behavior.
Secured credit cards can be used like any other credit card to make payments. They run on big payment networks like Visa, Mastercard, or American Express. But secured cards are designed especially for those with limited-to-no credit.
Lenders are reluctant to issue credit to borrowers who are facing financial headwinds or lacking a credit history. But they may be more willing to approve applicants for a secured credit card, as it requires a deposit that can be seized if the debt is unpaid.
This opens up a great opportunity for the financially weak to regain lost ground in credit. Most people use secured credit cards to build their credit scores. Typically, secured cards come with low credit limits and high interest rates. This makes it difficult to use them for large purchases. While this may seem as a drawback, it is actually a good way to put a check on expensive purchases.
How to get a secured credit card
Like any other credit card, the first step is to submit an application following which the lender or card issuer will conduct a credit check. The main difference between a secured and unsecured card application is that the former will require your bank account and routing number for processing a refundable security deposit.
Upon acceptance of your security deposit, the best secured credit card works just like any other card. If you decide to cancel the card, you will receive your deposit back, provided your balance is paid off.
