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How Do Secured Credit Cards Work?

Joint Credit Cards Affect Credit Score

Secured credit cards are an amazing tool used to rebuild or establish credit for those who are looking to set themselves up for a healthy financial future. Here is what we will quickly discuss about secured credit cards to make sure you are educated when you walk into your bank and the over-eager banker behind the desk, hands you a packet of credit card options that they know are just perfect for you.

  • What is a secured credit card?
  • What kind of deposit is required on a secured credit card?
  • How will a secured credit card help my credit in the future?

What is a Secured Credit Card?

Credit CardsTo begin, a secured credit card is just that, secured. This means it is a type of debt that is secured or held by money that the borrower (you) has put down. This typically looks like a small deposit that you put down upfront that becomes your new credit limit.

For example, when applying for a traditional (unsecured) credit card, the institution runs your credit and determines they will give you a $1000 limit on your card. You do not provide them with this $1000, but it is yours to borrow up to each month as your spending limit on your card. With a secured card, however, you typically will provide this money upfront, and the institution then uses this as your limit.

This puts the lender (the bank or institution) in a more secure position. If you don’t pay your bill, for example, then they would keep that deposit, and it provides much less risk to them. This is why secured cards are used for people with no credit or “bad” credit, as an alternative to a traditional credit card.

Deposit Needed to Open a Secured Card

So, you may be wondering, what kind of deposit would be required on a secured credit card? The short answer is, that it varies greatly by institution. However, a few of the most popular cards, namely Capital One, Discover, and First Progress range from $49-$2000.

Sometimes lenders will allow you to choose your deposit, others will give you a range and allow you to pick within that range. Typically they are around $200. It is important to remember, however, that these deposits do become your credit limit on the card. So, while choosing a very low limit at first may sound very enticing, it isn’t beneficial to choose a low limit only to spend 100% of your limit every single month you have the card.

How a Secured Card Can Help Improve Your Credit

The best part is, now that you know what a secured credit card is, and what kind of deposit is typical, you can start to see some benefits on that good old credit report. We all know that building or rebuilding credit is not something that happens overnight, but with a few small steps, you can get on the right track to setting yourself and your credit up for future success.

By paying off your secured credit card in full each month as well as making only a few small purchases on the card each month- you will start to see a boost in your credit in as little as one year.  At this point, you would be able to consider the options of applying for an unsecured credit card with a higher limit, and of course, continuing to build your credit over time.

Secured credit cards are the perfect option for people who are just starting to build or rebuild credit. Think of them as a credit card with training wheels. It provides you with a practice credit card with a lower limit, to get the hang of paying a credit card bill, spending within your limit, and checking your credit score. By establishing these habits, paying the card in full each month, and spending below your limit- you will be able to get approved for an unsecured credit card in no time.

Have questions about your credit score or need help building your credit?

Contact Credit Absolute for a free consultation!


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