How Do Secured Credit Cards Work?

Credit cards are heavily incorporated into our consumer-driven world. If you have a credit card, then you must know the deal by now. Pay for stuff with the card, and then pay the card balance off hopefully before interest can accrue. It’s a decent system. I sometimes like to look at like a mini loan here and there as you spend with the card, only to be repaid later.

While there are thousands of credit cards out there, plenty of consumers cannot get a credit card. Why exactly? Well, they don’t have good credit! What this means is that their history with debt is not exemplary, so they end up having trouble qualifying for a credit card since they are viewed as a high risk consumer. That is where secured credit cards come in. They offer a way for high risk consumers to lower their risk and build good credit. They differ a bit from standard credit cards, so let’s cover a couple of the obvious and need-to-know differences now.

They Require a Minimum Deposit

When you have secured credit card, you don’t really get to experience the freedom and trust that comes with a standard credit card. This means you don’t get a $2,500 credit limit right off the bat. In contrast, you need to drop a security deposit on the card, and the amount that you send in determines your credit limit.

The minimum security deposit for a typical secured credit card is $200, but some cards out there accept any amount or go as low as $50. So you could end up with a credit card that has a $200 credit limit which is low. However, this may be just the thing some people need to build good credit. If they can’t mess up that bad, then they can recover from their mistakes and learn without huge repercussions!

They Have Higher Annual Percentage Rates

There are so many cards out there that advertise their low interest rates, or APR. Having a low APR is extremely desirable, but you don’t really get that option with a secured credit card. Since secured credit cards are generally issued to higher risk consumers, they come with higher APRs. There isn’t really much of a way around this in terms of getting a low interest rate. Despite this, it isn’t too big of a deal. Many secured card holders start out with a $200 credit limit, so having a high APR won’t be a death sentence with such a low debt ceiling. On top of that, proactively paying your balance each month eliminates the risk of APR ramping up the balance.

They Lack Substantial Credit Card Benefits

While credit cards are competitively advertised for providing low interest rates, the real hard work funnels into advertising their benefits. A credit card benefit generally involves some sort of rate of return when spending such as a cash back rate of 1 or 2 percent. Other benefits include something like an introductory bonus of 40,000 points (equal to some value; this would typically be $400) for spending X amount of dollars in the first few months with the card.

These all sound nice, but secured credit cards typically do not come with these benefits. Let’s just say the real benefit to a credit card lies in the ability to build credit, opening the door to new financial opportunities such as a credit card with nice benefits!

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