What is a Secured Credit Card?

Secured credit cards are credit instruments that are issued by financial institutions such as banks. Like all credit cards, the secured card is established with specific terms relating to the rate of interest applied to the balance, minimum monthly payments, and a pre-determined credit limit. What is different about a secured credit card account is the card is backed by funds that the card holder deposits into a savings account that is managed by the card issuer.

The process for securing a card of this type is fairly straightforward. As with all types of credit cards, it is necessary to apply for credit privileges by filling out an application form. Along with completing the form properly and meeting the basic standards required by the issuer, the applicant also agrees to deposit a minimum amount of funds into a savings account controlled by the issuing entity. The balance in the savings account determines the credit line allowed for the card, with the credit limit being anywhere between eighty and a hundred percent of the savings account balance.

A secured credit card generally carries a rate of interest that is comparable to any type of high risk unsecured credit card. Payments are made on the outstanding balance of the card on a monthly basis. In the event that a secured card holder fails to make minimum monthly payments in a timely manner, the card issuer reserves the right to discontinue credit privileges, use the funds in the savings account to pay off the balance, refund any remaining balance, and close the account.

Obtaining a secured credit card can be beneficial in several situations. The most common reason for obtaining a credit card of this type is poor credit. For people who have been through a period of financial instability, a secured credit card can be one of the first steps in regaining a good credit rating. With a credit balance that is limited to no more than the balance in the savings account that effectively serves as collateral, the chances of running up a huge debt are minimal. At the same time, the secured credit card can be used to make a few purchases each month, which are promptly paid off before the due date associated with the account. This action helps to establish a positive credit reference.

A second advantage to the secured credit card is that the card holder has the opportunity to build up a savings nest egg while creating a positive credit reference. By incrementally adding to the balance of the savings account each month, the card holder will also earn more interest on the balance. At the same time, the credit limit will increase as the savings account balance increases. Within a short period of time, the card holder has established a source of interest income as well as begun the process of repairing his or her credit.

Many secured credit card plans do have some limitations. Most plans will not allow a credit limit higher than $5,000 US Dollars even if more funds are deposited into the savings account. However, there are a few secured plans that will allow a higher limit. In addition, most secured plans do not have any type of grace period for a late payment. Late fees are applied to the balance if the payment is not received and processed on or before the due date.