How Secured Credit Card work? Comparison with Unsecured Card

Secured credit cards can help you to deal with bad credit.This article helps you understand whatsecured credit cards are and how they work & differ from regular cards.Regular cards are also known as unsecuredcredit cards.

What is a Secured Credit Card

A secured credit card is supported with a cash deposit. Thatdeposit is originally your cash money submitted at the time of account opening.Deposit is generally equal to your credit limit, that’s why you will get $500credit limit when you deposit $500.

More importantly,deposit reduces the risk to the issuer of the credit card: If your bill is notpaid, the issuer can use the deposit money to pay that. These cards aretherefore available to people with poor credit or no credit history.

What bank will do with the deposit of $500 if one is paying the bill on time? Finally, you’ll get it back whenever you close your account. Use your secured credit card responsibly; this will improve your credit score. Eventually, you will qualify for an unsecured card — which requires no deposit.

Only some best-securedcredit cards can be used to upgrade your account to an unsecured card directly.Others either don’t have a process of upgrading or simply don’t allow you. Insuch case, you have to apply forunsecured card elsewhere and then close the secured card. If you upgrade orclose a secured card, you will get your deposit back.

Difference between Secured and unsecured credit card

An unsecured credit card is one that does not require a deposit. That is why it poses a higher risk to the issuer or bank. Furthermore, credit cardcompanies usually demand an average credit score for issuing the card and goodor excellent scores for the best options.

Some unsecured credit cards are easy to qualify even if youhave bad credit. But these cards are usually very expensive. We recommend youto apply for a secured card instead of a high-cost unsecured card.

How to Secured Credit Card Works

Secure credit card work like unsecured cards, once you paythe initial deposits.

  • Secured cards are accepted anywhere and you canuse it wherever a normal credit card isused even online.
  • With responsibleuse of secured credit card and paying the balanceon time, one can build or rebuild credit scores.
  • You will only get interest cost if your card carriesa balance

Majority issuers of credit cards offer secure or unsecuredcards. Furthermore, annual fees are usual, but you must not pay more than $50.Secure cards with an annual fee of $0 are highly favorable for everyone.

If you are not eligible for an unsecured card, a securedcard can be a great tool for improving your credit. However, it is as importantto use a secured credit card responsibly because it appears on your creditscore just like any other loan or bill.

Secured credit card vs. prepaid debit card

Secured credit cards appear to be similar with prepaid debitcards. You must pay before using the prepaid card and they usually have a Visa,MasterCard or American Express logo.

But you use your own money with prepaid debit cards to makepurchases, not money borrowed from the issuer. You load money on the card andthe bank pays for your purchases.

Since prepaid cards do not extend credit, the credit bureausdon’t get reports for account activity. You do not, therefore, build a credithistory with a prepaid card. Moreover, debit cards may also have fees whilesecured cards don’t.

Using a secured credit card effectively

Deposit is required for a secure credit card, however, theyare a powerful tool for credit rebuild. You can use it effectively to continueimproving your credit score.

  1. Use your secured card meagerly every month tomake one or two small purchases.
  2. Remember that, you have to pay your balance infull before the due date every month. You will not be charged interest if youpay in full. In general, the interest rate on secured cards is a bit higher incomparison with unsecured cards.
  3. Take a look at your credit score over time; ifit has improved significantly, request your card issuer for an upgrade to an unsecured card.

Most people experience that itonly takes about a year to improve their credit score to qualify for anunsecured card by using a secured card carefully. Moreover, some issuers mayallow transferring your secured credit line to an unsecured credit line. Thisoption is better for your credit score because you do not need to open a newaccount for that.

However, even if you want to applyfor a new account or in other words unsecured credit card, you can benefit fromthe advantages of good credit — lowerinterest, lower fees, and rewards.