A secured credit card is a type of credit card, which is secured by funds in 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 loads $1000 into account, credit in the range of $500 to $1000 will be given on the card. In some cases, credit card issuers will offer incentives on their secured card portfolios. In these circumstances, the deposit required may be significantly less than the standard secured card credit limit and can be as low as 10% of the credit limit applied. The deposit provided is held in a special savings account.
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Deposit and defaults on a payment
After submitting their deposit, the cardholder of a secured credit card is still expected to make regular payments and adhere to terms and conditions as with any regular credit card. In the event, a cardholder does default on payments the issuer has the option to recover the cost of purchases made on the card from the deposit account held.
Although the deposit is held as security by the card issuer to protect against default by the cardholder, the deposit will not be drawn against simply because the holder misses one or two payments. Usually, the deposit is used as an offset only when the account is closed, either at the request of the customer or due to severe delinquency with is normally measured as 150 to 180 days without payment.
Any unpaid account with a balance outstanding will continue to accrue interest for 150 days and this could mean the interest and balance due exceed the deposit held in the cardholders security account. In these cases, the total debt may far exceed the original deposit and the cardholder will not only lose their security deposit, but they will also be left with additional debt and bad credit. You should always contact the card issuer as soon as possible if you are having problems meeting your financial obligations.
The conditions that apply to secured credit cards are described in the card issuer’s cardholder agreement. The cardholder should make sure they are happy with them before signing up and opening their account.
Secured Credit Card Pros and Cons
Secured credit cards can be a good option if they are appropriate for your circumstances. They allow a person with a poor credit history or no credit history to have a credit card, which might not otherwise be available. Secured credit cards are often offered as a means of rebuilding credit, and are available with both Visa and MasterCard logos. Fees and service charges for secured credit cards are often higher than those charged for standard non-secured credit cards. However, for people who have a poor credit history or a background of delinquency with various forms of debt they might be the only practical option, and sometimes the overall cost can less than with standard credit cards, even when the security deposit is taken into account. It all depends on the terms and conditions, the individual user and the manner in which they manage their card.
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