What is a Secured Credit Card ?

Secured credit cards are typically for people with a poor credit score or no credit score who don’t qualify for a regular credit card. Secured credit cards are often offered as a means of rebuilding one’s credit. This type of card requires from the cardholder a deposit worth 100% to 200% of the total amount of credit desired. For example, if the cardholder gives a deposit of $1000, he will be given credit in the range of $500–$1000. However, credit card issuers will often offer incentives even on their secured card programs, and may require a deposit significantly smaller than the desired credit limit, which can be as low as 10% of the credit limit. The deposit is held in a special savings account and is used as security by the card issuer in the event of delinquency by the customer. Credit card issuers have noticed that default has notably reduced when the customer perceives something to lose if the balance is not repaid.

Except for the requested deposit, a secured credit card works exactly like a regular credit card: the cardholder is still expected to make monthly payments, and interests are still added to the debt. This allows the cardholder to build a positive credit history. The issuer can even reward the customer for good payments by adding to his credit line without requesting additional deposits. The secured deposit will only be used if the costumer is facing severe delinquency.

What are the advantages of a Secured Credit Card?

If you have a negative credit history or no credit history at all and thus are not eligible for a regular credit card, this option allows you to own a credit card and use it when credit cards are requested, as it is the case for renting a car, buying a plane ticket or reserving a hotel room for example.

Owning a secured credit card is an excellent way of building a good credit history if you have none, or to repair a bad one. The issuer reports regularly to all three major credit bureaus. How can you know your company is reporting? If after several months of on time payments you start receiving offers for unsecured credit cards, this means your bank is reporting.

If your goal is to restore your credit score, the best way of using a secured credit card is to pay your balance in full every month. To be able to do so, only use your card for a few purchases per month, and keep the balance at a low level.

The card issuer will be interested in keeping you as a customer as long as possible, so he will often qualify you for an unsecured card after a period of making all your payments on time. The average period for that to happen is about a year.

Warnings

Ask if the issuer will flag the report to the credit bureaus as a secured card, because such a flag could be a deterrent to rebuilding credit. Since you will certainly want to repair your credit history, you want to make sure your card wont work against you. Of course, secured cards have annual fees. Make sure you are aware of all the potential fees you will be asked to cover. Also, secured cards have higher interest rates than regular, unsecured cards, so be responsible and have discipline by always paying off your total amount due! Remember that being in a delicate financial situation doesn’t make you a naïve or vulnerable person! Some secured credit cards issuers will offer low fees and treat customer as real people, while others will treat them less then nothing. Make yourself respected! Impose yourself, your needs and your limits! Don’t let anyone take advantage of your situation! Remember the best way of having the power on your side is to be informed! By having the maximum information, you’ll know when someone is trying to fool you and when someone is honest and wants to help you.

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Be smart : Compare!

As with any financial service, shopping around is the key for finding the best deal. While comparing, don’t forget the more competition there is between providers, the more power you – as a customer – have! Contact potential card providers, and try to negotiate better terms and conditions by showing them their competitors have better offers. Since no one wants to loose a customer to their competitors, chances are your negotiations will be successful.