In most ways, a bank secured credit card is like any other card. It usually has a MasterCard or Visa logo, and you can use it anywhere you'd use a credit card of its type. You have to make payments every month and, if you carry a balance, you'll have to pay interest. The key difference lies behind the scenes. With a credit card, the bank lends you its money. With a secured card, you lend the bank your money.
Secured Card Deposit Accounts
When you open up a secured card, the bank requires you to open an account and deposit money with them. Typically, your card limit will be the amount of your deposit, so if you make a $500 deposit, you get a $500 credit limit. While the card is open and secured, you can't touch the money in your deposit account. The bank usually doesn't touch it, either, unless you don't make your payment.
Why Secured Cards
Secured cards allow you to get credit even if you can't qualify for unsecured lines of credit. Typically, banks offer secured cards to people who have had problems with credit in the past or to people that don't have a credit history that banks can use to judge their credit risk. While it works like a credit card for you, since the bank holds your money, it isn't taking the risk that it would with a credit card.
Secured Card vs. Debit Card
A secured card might seem like a debit card, but there's a key difference. With a debit card, you are pulling money right out of your checking account. With a secured card, the bank has your money to protect it, but it's still a loan. It's just a secured loan, just like how your car secures your car loan. For this reason, it's usually considered a credit card and can help rebuild your credit.
Secured Card Considerations
If you're considering a secured card, there are two things to watch out for. The first is to ensure that the lender will report information about your use of the card to the credit agencies and that it will report the card as a regular card without specially flagging it as a secured card. Doing this helps you build your credit if you use the card responsibly. The other consideration is that secured cards frequently carry relatively high interest and fees. While some fees might be unavoidable, shopping around with a few banks can help you find a better deal.
Steve Lander has been a writer since 1996, with experience in the fields of financial services, real estate and technology. His work has appeared in trade publications such as the "Minnesota Real Estate Journal" and "Minnesota Multi-Housing Association Advocate." Lander holds a Bachelor of Arts in political science from Columbia University.