What is a secured credit card? How do secured credit cards work?
You might ask yourself both questions, especially if you’ve heard how these cards can build or rebuild a credit history.
Whether you’re establishing credit from scratch or rebuilding credit after a bankruptcy, a secured credit card is a powerful tool for getting on the right track.
But while useful, you might not fully understand how secured credit cards work.
These credit cards are slightly different from unsecured credit cards—and to be perfectly honest, they don’t have as many attractive features or perks. However, if you’ve been turned down for an unsecured credit card, a secured card is worth consideration.
Here’s the nitty-gritty on how secured credit cards work, as well as how to build credit with a secured credit card.
What is a secured credit card?
A secured credit card works like any other credit card—in that you use the card for purchases, and then pay the balance at a later time.
But you might ask, why get a secured credit card instead of an unsecured card?
The reason is simple. If you apply for an unsecured credit card with no prior credit history, many banks will reject your application.
This is because you don’t have an “established” credit history. Therefore, the bank can’t determine your creditworthiness. And if there’s no way to gauge creditworthiness, you’re automatically labeled a “risky” applicant. You’re shot down before given an opportunity to prove yourself.
I know, it’s a catch-22–and in my opinion, a great unfairness when it comes to establishing credit. But it is what it is.
A secured credit card, however, can help you overcome this hurdle. It’s essentially a tool to establish your credit history. Some people apply for secured credit cards when building credit for the first time, and others apply when they need to rebuild their credit.
The good news is that the requirements for getting a secured credit card aren’t as strict as those for an unsecured credit card, so these cards are easier to get.
How do secured credit cards work?
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