A secured credit card is somewhere different from regular credit cards. As the name implies, the lender secures your line of credit with a security deposit. The main difference between regular and secured credit card is, a security deposit needs to be made to the credit card issuer. If a user defaults on payments, the card issuer keeps the deposit. Where, a regular/unsecured credit card allows the user to purchase goods or take cash advances, based on the commitment to pay after a certain time period.
The bank offers a credit line according to that security deposit, which is used as collateral. The spending limit will normally be 50-100% of the down payment. Most of the time, it is equal to the security deposit.
Who can apply for a Secured Credit card?
- People with poor credit score
- Recent immigrants
- Students or users who never got any chance to build a credit history
A person will face some problems in getting a regular credit card if he/she has a bad credit score. There are a few regular cards which can be issued to a user with bad or zero credit score, but they have a high annual fee which is deducted from their credit limit. In such situation, one can go for secured credit card option instead of a high-fee card.
Additionally, it can build a good credit history for the user because they report to major credit card bureaus. But secured credit cards have fees that regular credit cards do not. This includes application fee, processing fee and annual fee. With this, credit card companies limit their risk by only extending as much credit as would be covered by the security deposit, in case of default. Where, a regular/unsecured credit card allows the user to purchase goods or take cash advances, based on the commitment to pay after a certain amount.
Difference between Secure Credit & Regular Credit Card?
- User will be able to use a secured credit card wherever a regular credit card can be used.
A secured credit card will start working like a regular card after the initial deposit payment. It can be used wherever an unsecured credit card is used, including online payments. The balance needs to be paid with monthly payments or all at once. The user will incur interest if there is any delay in paying the credits.
Do all the banks give interest on security deposit?
- Not all the bank provide interest on the deposited amount.
Most of the issuers do not pay interest on a customer’s deposit. A few offer rewards on spending. Typically, there are no travel rewards, points or cash back provided by credit card companies. It is a bare bones credit product.
Generally, one opts for secured credit card option only if, he/she is getting rejected for a regular one due to bad credit score. So after getting one, users should try to improve their credit record. It will make them eligible for a regular card. Many credit card companies convert a secured credit card to a regular card after one or two years of timely payments. Even if your card can not be converted, you may get approved for a regular credit card with another credit card issuer after 12 months of on-time payments. In today’s era, secured credit cards have become an extremely important part of a person’s life, who wants to get back to a firm financial background.