Secured Credit Card: Improve Your Credit Score

If you have a poor credit rating, for whatever reason, you are likely find it difficult to obtain a credit card. That’s where secure credit cards come in.

Secure credit cards require a cash collateral deposit. Unlike a traditional credit account, where the provider allows you spend up to a certain limit of their funds each month, secured credit cards require you to input some of the money yourself. Confused? Here’s how it works.

Under a secure credit card arrangement, the debtor - that’s you - places funds on deposit with the bank or financial institution providing the card.

The lender then allows you to make credit card purchases, up to a value of 90%-150% of the amount you’ve placed on deposit. That percentage depends upon your individual circumstances and your arrangement with the bank. For example, if you’re arrangement allows 120% credit, and you have placed £500 on deposit, you have access to £600 on your credit card.

While secure credit cards are often the only choice available to consumers with a bad credit history, they’re also often the only option for those who are new to credit, such as university students and teenagers. Without a credit history, banks can be nervous about extending even small-scale credit facilities to you.

Thus, the purpose that secure credit cards serve is to enable people with poor or non-existent credit histories to use a credit card, and establish a fresh pattern of repayment and spending habits. Meanwhile, the bank feels that the risk of taking on a poor-credit customer is balanced out, as they have a cash deposit they have on file, which can be tapped into to repay the credit card debt if necessary.

Usually, that cash deposit must not to be withdrawn while you have a secured credit card account. You will earn interest on the account - generally, the interest rate is on-par with what you would earn on an ordinary savings account with your bank - but you’ll need to speak with your lender about specific rules regarding adding and withdrawing from the savings account. You should also ask how long your money is required to remain on deposit once you close the account, as some lenders may elect to hold the deposit for an extra month or two, to cover any late transactions and charges.

There are plenty of lenders on the market who are willing to offer secure credit cards, but it absolutely pays to shop around. Fees, charges and restrictions vary drastically, including application fees, interest rates, mandatory card insurance costs and annual fees, so remember to read the fine print.