What Is a Secured Credit Card?
A secured credit card is a kind of credit card backed up by the cardholder's cash deposit. This deposit serves as an insurance or collateral, providing security for the card issuer if the cardholder is unable to make payments.
Secured credit cards are generally issued to borrowers with sub-prime or minimal credit history. Such borrowers are also called thin-file borrowers. Secured cards help the borrowers boost their credit profile through regular reporting to credit reporting agencies.
Breaking Down Secured Credit Cards
Most of the credit cards issued are generally unsecured. Your ability to pay off the accumulated balance, the money that you owe to the credit card company, is neither assured nor secured. You agree to pay your balance either in full or instalments every month as per the contract with your lender.
However, you don't have to put up any of your assets or income as collateral to back the agreement. That is one reason why interest rates on such credit cards are so high — an unsecured debt is always riskier than secured debt. The high-interest rates are to make up for the lack of security, such as in the case of a home or car loan.
In the case of secured credit cards, you are generally required to back the deal with your credit card company with some sort of collateral or security.
When you apply for secured credit cards, your credit score and credit history are scrutinised by the card issuer through a hard review with any of the credit reporting agencies. Once your credit reports have been assessed, the credit-issuing company then determines the amount you will be required to deposit to open the account, and a new line of credit will be extended.
