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Secured Credit Cards

Secured credit card are perfect for people who want to build or rebuild their credit. It is great for young people who have not yet built a credit history, as well as people who have suffered credit setbacks such as bankruptcy. Consumers who have difficulty obtaining a standard credit card often find secured credit cards to be their only option.

A secured credit card is a special type of credit card that is linked to a savings deposit account. In order to obtain the card, the consumer must deposit an amount equal to the credit limit into the savings account. For example, if the credit card limit is $1000, she must deposit $1000 into the account.

The savings account acts as a safety net for the bank issuing the credit card as they can deduct payments from the account if the cardholder fails to pay. Without this safety net they would not agree to issue the card to someone they consider especially risky.

Even with the savings account in place to protect the interests of the bank, the cardholder is expected to make their monthly payments as they would with a regular credit card. Their monthly payment will not automatically be deducted from their savings account.

If the cardholder begins missing payments, they will be hit with the same late fees and interest rate hikes that regular credit card holders experience. The funds in the savings account will only be used in cases of severe delinquency or when the account is closed at the cardholder's request while a balance remains.

Since late or missed payments result in hefty late fees and interest rate increases, a cardholder can quickly find her balance owed exceeding the amount of her savings account. In this case the bank will likely collect the money from the account. The cardholder not only forfeits the funds their account, but they may be left with significant additional debt.

Another thing to keep in mind before applying for a secured credit card is that fees and interest charges are usually higher than those associated with regular credit cards. All of these details should be listed in the cardholder agreement you sign when applying. Make sure to read the terms carefully.

Of course, even with its potential pitfalls the secured credit card is still a great way for people with a poor credit history to have access to a credit card they would otherwise not be able to obtain.

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