Also known as a secured credit card, a secured card is a credit card that is issued by a financial institution in exchange for the establishment of a savings account with that institution. The savings deposit acts as collateral on the credit card account, thus ensuring that even if the cardholder fails to manage the account responsibly, the institution will not experience a loss as a result. Secured card programs are often utilized by people who wish to rebuild their credit after some sort of financial reversal, as well others who may find it hard to secure a credit card through other means.
There are different secured card programs offered by a number of institutions. A basic model calls for the deposit of a minimum amount of funds in a savings account. In most cases, the amount of funds in the savings account will determine the credit limit on the card, with many plans allowing that credit limit to match the full amount of savings. Other plans establish the credit limit as a percentage of the total amount in the savings account, such as 80%. Typically, the depositor can subsequently deposit additional funds into the savings account and thus increase the credit limit over time.
With a secured card plan, the annual percentage rate may be somewhat higher than other types of credit card plans, although the difference may be a relatively small one. In addition, some plans call for the inclusion of an annual fee in the credit card program. There is often some sort of processing fee charged at the time the account is established. This fee may be partially offset by the interest that is accrued on the balance of the savings account. In recent years, some banks and other institutions that provide secured card services have opted to eliminate the processing fee or reduce the annual fee in exchange for not applying interest to the balance in the savings accounts.
Consumers can enjoy several benefits with a secured card. People who have been through severe financial situations that destroyed their good credit rating can obtain a secured account with relative ease, and begin the process of rebuilding their damaged credit. Since many programs do not require the applicant to hold a steady job, the secured card approach is ideal for people whose main sources of income may be a trust fund, alimony, or some other source that is not connected with employment. The necessity of establishing a savings account to back the credit card also helps to encourage consumers to save money while they work on restoring their credit ratings. Many secured plans can eventually be converted into unsecured plans at some point, assuming that the consumer demonstrates solid financial responsibility and the institution determines that he or she is now a good credit risk.