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A
secured credit card is a type of credit card
secured by a
deposit account
owned by the cardholder. Typically, the cardholder
must deposit between 100% and 200% of the total
amount of credit desired. Thus if the cardholder
puts down $1000, he or she will be given credit in
the range of $500–$1000. In some cases, credit
card issuers will offer incentives even on their
secured card portfolios. In these cases, the
deposit required may be significantly less than
the required credit limit, and can be as low as
10% of the desired credit limit. This deposit is
held in a special
savings account.
The
cardholder of a secured credit card is still
expected to make regular payments, as he or she
would with a regular credit card, but should he or
she default on a payment, the card issuer has the
option of recovering the cost of the purchases
paid to the merchants out of the deposit. The
advantage of the secured card for an individual
with negative or no credit history is that most
companies report regularly to the major credit
bureaus. This allows for rebuilding of positive
credit history.
Although the deposit is in the hands of the credit
card issuer as security in the event of default by
the consumer, the deposit will not be credited
simply for missing one or two payments. Usually
the deposit is only used as an offset when the
account is closed, either at the request of the
customer or due to severe delinquency (150 to 180
days). This means that an account which is less
than 150 days delinquent will continue to accrue
interest and fees, and could result in a balance
which is much higher than the actual credit limit
on the card. In these cases the total debt may far
exceed the original deposit and the cardholder not
only forfeits their deposit but is left with an
additional debt.
Most
of these conditions are usually described in a
cardholder agreement which the cardholder signs
when their account is opened.
Secured credit cards are an option to allow a
person with a poor
credit history
or no credit history to have a credit card which
might not otherwise be available. They are often
offered as a means of rebuilding one's credit.
Secured credit cards are available with both
Visa
and
MasterCard
logos
on them. Fees and service charges for secured
credit cards often exceed those charged for
ordinary non-secured credit cards, however, for
people in certain situations, (for example, after
charging off on other credit cards, or people with
a long history of delinquency on various forms of
debt), secured cards can often be less expensive
in total cost than unsecured credit cards, even
including the security deposit.
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