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The old adage “You can’t build something from nothing” rings true in many areas of life. When it comes to credit, the statement can strike a big chord: if you have no credit, or your credit’s been damaged, how do you go about building it up? You can’t get credit with no credit, right?
Actually, you can — by way of a secured credit card.
What is a Secured Credit Card?
If you are looking to establish credit, build, or rebuild your credit then you may want to consider a secured card. A secured card is a credit card in which you are required to put down a security deposit which is held by the card issuer as collateral in the event you do not meet your financial obligations on the card.
Use the card regularly and responsibly, and (all else equal) over time you may find you qualify for an unsecured card, as long as you are also being responsible with any other credit cards and loans you have. Your security deposit will be returned to you, as long as your balance is paid in full and you don’t have any outstanding issues or obligations remaining on your card.
Two primary ways to handle your credit accounts responsibly is to make sure your payments are on-time, and by keeping your balances low in relation to your credit limits.
How Do Secured Credit Cards Work?
With an unsecured credit card, your card issuer grants you a limit to borrow from at will. The limit, and all of the other terms associated with the card depend on your creditworthiness and other factors.
With a secured card, on the other hand, you must make a cash deposit which is held by the card issuer. That deposit is usually (but not always) equal to the credit limit on the card. The deposit is held as collateral in case you default on your debt. You must still pay your bill each month. Your deposit is not applied to your balance due, unless you default on the debt on your card.
Your credit limit, then, is “secured” by the funds you deposit.
Apart from this difference, a secured credit card works like any other credit card. You make purchases or cash advances with the card and then you are required to pay the balance due. If you make on-time payments and keep your balance low (no more than 30%, and preferably less than 10%) relative to your credit limit, use of a secured card can be a tool to help you improve your credit and overall credit standing over time. Remember it is up to you to handle your credit obligations responsibly.
If you want to increase your credit limit, you can usually just deposit more money into the collateral account. In some cases, the issuer may agree to a limit increase without additional security funds if you have demonstrated consistent responsible card use for a period of time (usually six to twelve months).
Cardmembers may find that after about a year of responsible secured card use, as well as review of their overall credit history across all credit cards, and loans, they may qualify for an unsecured card. In fact, some secured card issuers automatically review your credit accounts after a period of time to see whether you are eligible for conversion to an unsecured account.
When your account is converted to unsecured, or you decide to close it for any other reason, you can get your security deposit back, as long as your balance is paid in full and you don’t have any outstanding issues or obligations remaining on your card.
If you look around and compare offers you may find some secured credit cards can be more than just a no-frills credit builder they may offer some perks and benefits that may interest you.
We included one example below.
For Bad Credit or No Credit Consider: OpenSky® Secured Visa® Credit Card
Annual fee: $35
For individuals with bad or no credit the OpenSky® Secured Visa® Credit Card may be a card worth a closer look, there’s no credit check necessary to apply. The security deposit you provide becomes your credit limit on your Visa® card. Choose it yourself, from as low as $200. The security deposit is refundable* and your Pledged Deposit Account will be closed once you satisfy in full all your account obligations under the agreement. (*View the cardholder agreement)
Your account activity is reported to all three major credit bureaus which will help document your credit card activity. With responsible credit card management by you, this could help you build your credit and creditworthiness.
The OpenSky® card comes with a $35 annual fee and a foreign transaction fee of 3% of each transaction in U.S. dollars.
OpenSky® Secured Visa® Credit Card features we want to mention:
- No credit check necessary to apply
- Your refundable* deposit, as low as $200, becomes your OpenSky Visa credit limit (*View the cardholder agreement for more details)
- Reports to all three major credit bureaus
- $35 annual fee
- Foreign transaction fee of 3% of each transaction in U.S. dollars
What is the Difference between a Secured and Unsecured Credit Card?
A secured card, as we’ve mentioned, requires a security deposit made by you and held by the credit card issuer. Without it, the card issuer will not extend credit to you. An unsecured card, however, is acquired by virtue of your creditworthiness, and other factors; the card issuer extends credit with no collateral on your part.
As far as a secured card, even if your credit limit is greater than the amount of your deposit, a secured card is not considered to be unsecured. If your credit is good enough to qualify for a limit greater than your deposit, however, you will have greater purchasing power in your wallet.
In conclusion, choosing a credit card is an important decision so compare offers, review the terms and conditions and find a credit card that best suits your needs.
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Provider’s Terms: *See the online provider’s application for details about terms and conditions. Reasonable efforts have been made to maintain accurate information, however, all information is presented without warranty or guarantee. When you click on the “Apply Now” button, you can review the terms and conditions on the provider’s website. Offers are subject to change and the terms displayed may not be available to all consumers.
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