With a secured credit card you can get the convenience and flexibility of a credit card with a far lower risk of rejection.
How do most credit cards work
Standard credit cards are unsecured. This means that if a borrower doesnít pay back the only way the credit card provider can get their money back is, after a few threatening letters, taking the borrower to court and applying whatever sanctions the court allows them. And the chances are that there are other lenders who wish to do exactly the same, so the lender will join the queue.
Issuing a standard credit card is a bet on a personís credit worthiness. As most lenders are getting more picky in the credit crunch then fewer of them are taking those bets.
How do the Secured Credit Cards work
To get a secured credit card you will have to offer security to obtain the card. Just like a mortgage, where your security is the house that you are buying, so you must offer either your house or a cash deposit as security that you will pay back what you owe. This credit card is now not so much of a bet as the lender is far more likely to get their money back when you default, and so will not be so worried about what happens if you do default.
You also may have to pay a set up fee to start the whole process, which is often refunded if you are refused. Secured credit cards tend to have higher interest rates and attract similar fees to standard credit cards.
Secured credit cards broadly benefit those people who need credit cards, but on whom the credit card providers are not willing to give the card. Essentially you are likely to get refused for a standard credit card if you have a poor credit rating. This can be because you have filed for bankruptcy or have past credit problems. Alternatively it may be because you are a recent immigrant or have rarely borrowed in the past, so you donít have any credit history on which the credit card providers can judge your credit worthiness.
If you fall into one of these categories then secured credit cards are for you. Because there is less risk to the lender then it also means that there is less chance of being rejected and less need for sometimes intrusive questions about your spending behaviour.
Spending on a Secured Credit Card
The secured credit looks like a credit card and you can use it to buy things in the shops or over the internet. It will have a limit which is based on the amount of money secured on the card (usually more than the security), which works in the same way as a credit limit.
Using a Secured Credit Card to rebuild a credit rating
A secured credit card is recognised as one of the fastest ways to rebuild a poor credit rating. As it is a credit card, then it is treated as borrowing. So the credit card provider reports the payment history to the credit bureaus each month. With every on time payment the credit rating improves.
Different types of security
There are two main types of security, money and home equity. Money is usually held in deposit with the provider. It tends to attract a lower rate of interest (if any) when the account is in credit. The limit is then set at your deposit.
Home equity works in a similar way to a home equity loan, apart from the balance changes far more frequently. You simply allow the credit card provider to take a charge on your house should you fall in default. You will have to have a certain amount of equity in your home and sign to allow the provider to take this if you fall in default. This method usually allows for more money to be borrowed, but more is put at risk.
Be aware under both of these that your money, or your house, is at risk if you donít pay what you owe.