What is a “Secured” Credit Card?

While most of what you’ll find here is information related to plain old, run-of-the-mill credit cards, I thought I’d take a bit of time to write about “secured” credit cards. A secured credit card is a special type of card that is targeted at high-risk borrowers with low credit scores.

How secured credit cards work

Secured credit cards are typically backed by a deposit account owned by the cardholder. In short, the cardholder deposits a specified amount of money from which the card issuer can recover funds if the cardholder defaults on their obligations.

Credit limits on secured credit cards vary. limits equal to 100% of the deposited amount are common. However, it’s not unheard of to require customers to put anywhere from 10% to 200% of their limit on deposit, with lower risk borrowers landing at the low end of this range, and higher risk borrowers at the high end.

While the deposit is held by the credit issuer as collateral for what’s owed, it typically isn’t debited for individual missed payments. Rather, the deposit is generally only used to offset amounts owed when the account is closed, either by the cardholder or, in the event of severe delinquency, by the credit issuer.

The downside to this approach is that the account will continue to accrue interest and fees for up to six months before the deposit is used to offset the amount owed. It is therefore conceivable that the amount owed will ultimately outstrip the amount of the deposit, leaving the cardholder with additional debt even after the deposit is forfeited. Obviously, this is good for the card issuer and bad for the cardholder.

So why would someone opt for a secured credit card?

The main reason someone would apply for a secured credit card is that they’re easier to get than a “regular” (i.e., non-secured) credit card if you have a poor credit history, or if you’ve never had credit before. Unfortunately, fees and service charges associated with secured credit cards often exceed those for non-secured credit cards.

Regardless, secured credit cards can be a useful tool for rebuilding your credit if you’ve run into trouble in the past. They also provide cardholders with the convenience of being able to pay with plastic at any merchant that accepts Visa or MasterCard, though the same sort of convenience could be achieved through the use of a Visa- or MasterCard-branded debit card.