Should you have a bad credit rating, whatever the reason may be, you may find that a credit card might be hard to come by. This is where secure credit cards can be useful.
Secure credit cards require a cash collateral deposit. Unlike a traditional credit account, where the provider allows you spend up to a certain limit of their funds each month, secured credit cards require you to input some of the money yourself. Confused? Here's how it works.
Under a secure credit card arrangement, the debtor - that's you - places funds on deposit with the bank or financial institution providing the card.
The lender then allows you to make credit card purchases, up to a value of 90%-150% of the amount you've placed on deposit. That percentage depends upon your individual circumstances and your arrangement with the bank. For example, if you're arrangement allows 120% credit, and you have placed 500 on deposit, you have access to 600 on your credit card.
As secure credit cards are normally the only available choice to consumers with a poor history of credit, they're often also the only option for those who are new to credit, such as teenagers and university students. Without a credit history, banks are often nervous about lengthening even minor credit facilities to those consumers.
Thus, the purpose that secure credit cards serve is to enable people with poor or non-existent credit histories to use a credit card, and establish a fresh pattern of repayment and spending habits. Meanwhile, the bank feels that the risk of taking on a poor-credit customer is balanced out, as they have a cash deposit they have on file, which can be tapped into to repay the credit card debt if necessary.
Normally, its frowned upon to withdraw the deposit while you have a secured credit card account. Interest will be accrued on the account - generally, the interest rate is equivalent with what would be earned on an ordinary savings account with a bank - but you'll have to discuss with your lender about specific rules regarding withdrawing and adding from the savings account. You should also inquire as to how long your money is required to remain on deposit once the account is closed, as some lenders may decide to hold the deposit for an additional month or two, to compensate for any late transactions and charges.
There are plenty of lenders on the market who are willing to offer secure credit cards, but it absolutely pays to shop around. Fees, charges and restrictions vary drastically, including application fees, interest rates, mandatory card insurance costs and annual fees, so remember to read the fine print.
About the Author:
Peter Carville is a freelance article writer who writes for Financial Facts about the current financial news and the credit crunch.
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