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18 MAY, 2023
Credit cards offer a convenient way of making purchases by eliminating the need for cash. They help build the purchasing power of a person while enabling the user to maximize their savings. In addition, paying through a credit card eliminates the hassle of writing cheques and counting bills.
One of the most popular credit cards is a secured credit card.It is compulsory for a cash deposit in the bank for issuance. The creditworthiness of the person is the primary factor when issuing the card.
Features of a Secured Credit Card
A secured credit card is issued with a guarantee, usually in the form of fixed deposits. Here are its features:
How a Secured Credit Card Works
If you are wondering, “What is a secured credit card?” When you apply for a secured credit card, you must make a cash deposit upfront. This deposit serves as collateral and determines the credit limit that you'll be extended. The deposit typically equals the credit limit, though some lenders may require a higher deposit. The lender holds the deposit as security if you default on your payments.
Once approved for the secured credit card, you can use it to purchase like a traditional credit card. You'll receive a monthly statement that shows your balance and the activity on the card during the specified month. You'll be required to pay at least the minimum due each month and be charged interest on any outstanding balances.
How to Apply for a Secured Credit Card
To apply for a secured credit card, the process is the same as applying for a regular credit card, with most significant lenders like Visa, Mastercard, and Discover issuing them. These cards are accepted wherever the card brand is accepted, with the cardholder receiving monthly statements detailing their balance and transactions. The cardholder must pay at least the minimum due and pay interest on outstanding balances as per the credit agreement.
Like regular credit cards, secured cards may have an annual fee and other charges such as setup, activation, monthly maintenance, credit increase, and balance inquiry fees. As part of the agreement, the cardholder must put up a deposit that determines the credit line extended and is based on their credit score and history, assessed through a hard inquiry. You should know the secured credit card definition to understand it better.
Pros & Cons of a Secured Credit Card
Every financial assistance tool provided by financial institutions has a set of pros and cons. Here are the pros and cons for secured credit cards:
Secured credit cards help the user to build credit scores by analyzing transactions through the credit bureau.
Coming up with a security deposit may be difficult, making it tough to secure a credit card.
The eligibility criteria for availing secured credit cards are easy.
Secured credit cards also charge a considerable fee, including maintenance, application, processing, and annual fees.
The approval rate for such credit cards is comparatively higher than traditional and unsecured credit cards.
In addition to fees, users would also have to pay higher interest in secured credit cards, increasing monthly charges on the card.
The security deposit against which the secured credit card is issued will be returned to the user if they do not default on a payment.
Due to the credit limit being 80% of the value of the security deposit, large purchases are also limited with secured credit cards.
The security deposit would earn interest which results in additional profit for the user.
If the user wants to upgrade their secured credit card to an unsecured credit card, this may affect their credit history adversely.
Difference Between Secured & Unsecured Credit Card
On making a credit card comparison, one can easily decide about applying for a specific type of credit card. The following table shows the distinct difference between a secured credit card and an unsecured credit card.
Users can qualify with zero credit scores and history.
Users have to pay a high rate of interest.
Possibility of earning rewards is bleak.
Users are charged extra fees by issuers.
Such credit cards always have the status of being secured.
Credit limit is as per the security deposit made by the user.
Secured credit cards do not require credit checks by issuers.
A secured credit card provides an opportunity for a user to create or modify their credit history. People with low or nonexistent credit scores can enhance their creditworthiness with the help of secured credit cards. They are a great way to avail a credit card without the stress of credit checks and comparisons.
Also Read: Difference Between Visa & Mastercard
Q1. What is a secured credit card and how does it work?
Secured credit cards operate similarly to regular credit cards with one significant difference; the cardholder must provide an upfront cash deposit as collateral to secure their credit line. Even though credit history may be used to assess eligibility, the security deposit is a requirement to obtain a line of credit with a secured card.
Q2. What are the features of a secured credit card?
Q3. How does a secured credit card differ from an unsecured credit card?
If you don’t know what is secured credit card is, A secured credit card is a type of credit card that functions similarly to an unsecured credit card but with one significant difference. The cardholder must make a cash deposit upfront, known as a security deposit, which serves as collateral for the credit line. This deposit is usually equal to or less than the credit limit the card issuer offers. With a secured credit card, the cardholder must make regular payments on the balance, including interest charges, typically higher than with unsecured credit cards.
Q4. How can you use a secured credit card to improve your credit score?
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