Credit Card Glossary
Secured Credit Card
People who may not otherwise be able to qualify for a standard credit card may find that they are eligible for a secured credit card. This type of credit card requires that the credit card holler have a bank deposit with the card-issuing bank. This deposit is used to guarantee or secure the payment of the credit card bills.
Typically, the cardholder must deposit between 100% and 200% of the total amount of credit desired. Thus if the cardholder puts down $1000, he or she will be given credit in the range of $500–$1000. In some cases, credit card issuers will offer incentives even on their secured card portfolios. In these cases, the deposit required may be significantly less than the required credit limit, and can be as low as 10% of the desired credit limit. This deposit is held in a special savings account.
The line of credit extended on the secured credit card is closely related to that bank account which can be reached by the bank if the credit card holder fails to pay his or her monthly credit card bill.
Secured credit cards are often used to repair damaged credit or establish a credit history where there is none. The responsible use of a secured MasterCard or Visa may enable someone to establish a good enough credit record to enable him or her to become eligible for a standard, unsecured credit card.
The cardholder of a secured credit card is still expected to make regular payments, as he or she would with a regular credit card, but should he or she default on a payment, the card issuer has the option of recovering the cost of the purchases paid to the merchants out of the deposit.
Although the deposit is in the hands of the credit card issuer as security in the event of default by the consumer, the deposit will not be credited simply for missing one or two payments. Usually the deposit is only used as an offset when the account is closed, either at the request of the customer or due to severe delinquency (150 to 180 days). This means that an account that is less than 150 days delinquent will continue to accrue interest and fees, and could result in a balance, which is much higher than the actual credit limit on the card. In these cases the total debt may far exceed the original deposit and the cardholder not only forfeits their deposit but also is left with an additional debt.
Most of these conditions are usually described in a cardholder agreement, which the cardholder signs when their account is opened.
Secured credit cards do not differ in appearance from unsecured credit cards in any way so there is no embarrassment if you have to use one.