A secured credit card is very much like a regular credit card, but the major difference is that you’re required to make a deposit against the card’s credit limit. Your credit limit will usually be a percentage of your security deposit or it may be the same as your deposit.Typically an applicant for a secured credit card must deposit between 10% to 200% of the total amount of credit they want. For example if they want a card with a $1000 credit limit they may need to put down a deposit of $1500. In many cases however the deposit may be significantly less than the requested credit limit. Credit card issuers began offering this option for customers as a means of rebuilding credit or simply building credit. Credit card issuers noticed that when the customer thinks they might lose something they are far more likely to pay back the monies owing on time.
In many cases the deposit is around 10% of the credit limit offered. The cardholder is still required to make regular payments on the balance held on the card but the deposit is held as a security measure in case of default. There are a great deal of advantages to the individual who applies for this type of card. The use of the card and regular payments allows the cardholder to develop a credit history that will be useful for bigger purchasers in the future such as a car or even a mortgage.
These types of credit cards do come with conditions that are described in the cardholder agreement. The deposit held by the card issuer will not be debited simply for missing a couple of payments. The deposit is only used as an offset when an account is closed. Accounts are only closed at the request of the customer or when the account is greatly overdue (150-180 days). This does mean though that an account that is say 150 days overdue will continue to gather interest and fees and could end up with a balance that is far higher than the actual initial credit limit. As such the cardholder may be left with a total debt that far exceeds the original deposit and is still required to pay it all back.
Secured credit cards are a great option for building a credit rating or re-establishing credit after a poor credit history. The fees and interest levels charged on these types of cards can be much higher than a standard credit card and for certain people with a very bad credit history these cards can prove to be quite expensive compared to standard card.