What’s a secured credit card? Its Merits and Drawbacks

Secured credit card : A secured card is like any other credit in terms of the privileges it offer except the fact that one can get it only after making a cash deposit with the bank or any other credit card issuer. This cash deposit acts as a security deposit that helps the banks to ensure that the customers are serious about making their payments on time. And this security deposit is refundable. The credit cards you normally hear in the routine chats are unsecured credit cards.

secured credit card

How does it work?

There’s not much difference between secured and unsecured credit card in terms of how they operate. Secured credit cards work exactly same like unsecured ones, but in case of any defaults in making payment of any due the security deposit will be used by the banks to recover the dues.

Why does one go for a secured credit card?

Secured credit cards are very good for those who have either very poor or no credit score to build their credit score from scratch. If u do not have enough of a credit history while making a loan application, the chances of banks rejecting your application is more. In such cases secured credit cards help to build your credit history quickly. If your credit score has been negatively affected due to the late payments made by you in respect of your credit card dues then secured credit cards are a good way to go to boost the credit health.

Credit limit:

A fixed percentage of your cash security deposit is generally allowed as credit limit. Normally it is between 80% and 90% of the deposit made by the customer.

Secured credit cards Versus Normal Debit cards:

When you make a payment using debit card, the funds get deducted from your bank account directly, but in case of secured credit card banks lend you some money to use which you have to pay back as per the terms of service. However, the major difference between a debit card and a secured credit card is that a debit card does not have any role in building your credit history while a credit card affects very much in building credit score.

Advantages of secured credit cards:

  • When your application for a traditional card gets rejected by the banker due to poor or insufficient credit history then secured credit card is good option to fill the gap so that you can get a loan or credit card with improved credit score in future.
  • You can earn interest on the security deposit. While acting as an additional promise on your behalf, your cash deposit with the bank fetches some interest though the rate is not so attractive.

Drawbacks of secured credit cards:

  • High interest rates – Secured credit cards come with relatively higher interest rates when compared to traditional credit cards.
  • Expensive – Considering the facts that card is issued assuming high risk to a customer with poor or no credit history, secured credit cards carry high amount of annual fees and service charges than traditional unsecured credit cards.

Bottom line:

If your credit card application has been rejected by the bank because of the fact that you have a very poor or no credit history then secured credit cards are a good to go to build an impressive credit score. Improved credit score may help you secure credit cards and loans in the longrun.

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