Credit cards offer you credit that enables you to buy goods and services or pay your bills. You will then pay off that loan later on, usually every month. Top credit companies and banks typically offer the card based on your creditworthiness, which is your ability to pay back what you owe reliably.
Most cards are unsecured and thus not backed by any security to safeguard the financial institutions if you default. However, secured credit cards exist. And they are worth considering too.
How Secured Credit Cards Work
A secured credit card requires you to put a cash deposit as collateral for you to access it for your financial needs. If you default your payments after getting credit, the financial institution (such as a bank or credit union) providing the loan will use your deposit to recover their monies. Usually, one is required to give the security during the application process.
However, in other ways, a secured credit card works similarly to the standard unsecured versions. That means it comes with an interest rate, a credit limit and possibly some rewards.
Generally, the amount of deposit that you put up as collateral will serve as your credit limit. So, if you deposit $1,000 against the card, that’s what you will access as credit. But some institutions will offer you a higher credit limit compared to your security.
In addition, you may need to deposit the entire amount at once in some cases but be allowed to deposit the collateral in installments in other cases. So, that’s something to think about.
Also, you will be given one variable interest rate, which depends on the financial institution offering the credit card.
It is also worth noting that the deposit you make is not what you will use to pay your credit debt with. It’s meant to act as security for as long as your secured card is in use. So, you cannot use it every pay period. Therefore, you must pay off your credit card debt using other funds.
Benefits of Secured Credit Cards
Secured credit cards offer two significant benefits:
- They enable you to build a credit history for the first time if you have never had a credit card or borrowed any loan before.
- They enable you to repair poor credit history if you have made bad financial decisions in the past and want to rectify your mistakes.
Many top credit card companies may be reluctant to offer loans if they consider you a risky borrower. And that could happen if you have no credit history that can help them determine your reliability. Also, if you have defaulted on payments in the past and have decimated your credit scores, they may be afraid you could do so again.
So, a secured credit card shows them you can pay some or all of what you owe them even if you default. And thus, they may be more willing to offer you credit. On the other hand, you will get the chance to improve your credit history for future borrowing purposes.
How to Get a Credit Card Deposit Refund
You can get a credit card deposit refund if you are not interested in using an unsecured credit card. And that refund is available under two main conditions.
1. You Use the Secured Card Responsibly
If you would like a secured credit card deposit refund, you need to use your card responsibly. And that means paying off what you owe in full and on time. That way, when you close your account, it will be in good standing.
So long as you do not have any balance when you close your account, your credit card company will have no reason to keep your collateral. So, when you ask for it, they will give it back to you.
2. Upgrade to an Unsecured Card
You could also get back your deposit if you upgrade to an unsecured credit card.
By the time you qualify for an unsecured credit card, you would have paid off your balances for a while and built up a good credit history showing your reliability as a borrower. In many cases, one year of reliable payments should do it. But some credit card companies will wait until you put in a request for an unsecured card.
To raise your chances of upgrading, it would be best if you got the unsecured card from the same financial institution where you got the secured version.
Secured credit cards are worth considering if you have no or poor credit history. But once you prove your reliability as a borrower, it helps to move on to unsecured versions. That way, you can use your security deposit to increase your investments.
I have been a freelance writer since 2011. When I am not writing, I enjoy reading, watching cooking and lifestyle shows, and fantasizing about world travels.