Secured credit cards are those types of cards that require a cash collateral deposit. This cash deposit becomes the credit limit for that account. You may also add to the deposit if you wish to increase your credit limit. Certain banks reward you with points on your secured credit card if you maintain a good credit.

Unsecured vs. secured credit cards
Unsecured credit cards are your regular credit cards that don’t require a deposit against your credit card account. In contrast, secured credit cards, as discussed above, require you to deposit a certain amount that will act as a credit limit. Unsecured credit cards offer a credit limit based on your credit score. Since they don’t require a minimum deposit unlike secured credit cards, they pose a certain risk to the credit card issuer.

There are certain banks that offer secured credit cards against a minimum security deposit. For instance, some banks require you to have a minimum balance of around $50 against which they offer the user a credit limit of around $200 or an amount deposited by the user.

How do secured credit cards work
Once you pay an initial deposit, secured credit cards work just like unsecured credit cards. You can use them wherever credit cards are accepted. For example, if you have $1000 in your account, then with a secured credit card, you will be able to purchase goods worth $1000. You can build or rebuild your credit score which will eventually help you earn rewards and thereby increase your credit limit. However, if you carry a balance, then you may incur an interest against your credit card account.

Secured credit cards can be a great tool if you cannot qualify for unsecured credit cards as they help you build a good credit history. Some banks track your credit history through your secured credit card. Moreover, if you have to manage to maintain a good credit score for at least 12–18 months, they offer you to convert your secured credit card into an unsecured credit card.

Benefits of using secured credit cards

• Secured credit cards typically report to credit bureaus. They let you make electronic payments just like credit cards. These secured credit cards will report your account history to the credit bureau which helps you build a good credit score.
• You can get approved for secured credit cards easily as compared to unsecured credit cards. Secured credit cards shift the credit risk away from the credit card issuer.
• The security deposit will be used if you default on your payment. You won’t get sent to collections for defaulting on your payments unless your defaulted balance is more than your security deposit.
• Since secured credit cards place your deposit in an interest-accumulating savings account, you can earn an interest on your deposit. You might be able to earn a few extra bucks depending upon the interest rate and the amount of time the deposit remains in your account.
• Some credit card issuers will allow you to transfer the credit line of your secured credit card to an unsecured one. This is better for your credit score as it does not require you to open a new savings account.

As much as secured credit cards might sound a good idea, they come with their share of drawbacks. Some of them are as follows:

• Secured credit cards incur a higher interest rate. This is because of the risk of default. Hence, ensure to pay your balance in full every month to avoid high charges.
• Paying a security deposit can also be counted as one of the main drawbacks of having a secured credit card. This is because there are many banks that offer secured credit cards that require you to pay a security deposit of around $100.
• In addition to the security deposit, you might also have to pay an application fee, processing fee, and also an annual fee to use your secured credit card. This increases the initial costs of having a secured credit card. Thus, ensure to shop for a card that has the lowest fees.

Although secured credit cards attract a high processing and application fee, they are a powerful tool that can help you build your credit.

There are certain ways in which you can use your secured credit card effectively. They are as follows:

• Paying your balance in full every month before the due date will not attract any charged interest.
• Try using your card sparingly. Make only one or two purchases every month using your secured credit card.
• Keep a track of your credit score. If it has improved over time, ask your issuer to upgrade your current card to an unsecured credit card.

Even if you don’t get an unsecured credit card, you might still be entitled to get the benefits of maintaining a good credit score. This includes lower interest rates, rewards, and competitive annual fees.

Secured credit cards can go a long way to help you build a good credit score. There are various banks that offer secured credit cards. You can visit their official website or their nearest branch to know more information and apply for the same.