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How Does a Secured Credit Card Work?

Author: (Matthew Frankel) / Source:

If you’re trying to rebuild credit, a secured credit card is a much better choice for your electronic payment needs than a debit card. With a secured credit card, you’ll have a line of credit at least equal to your security deposit, and as you establish good credit behavior with the card, your credit score could begin to rise.

In most ways, secured credit cards work just like standard credit card products. They have a predetermined spending limit, an interest rate, and they are part of a major payment processing network (Visa, MasterCard, American Express, or Discover), and therefore are accepted just like standard credit cards.

The major difference is that in order to get the card, you’ll need to put up a security deposit, typically equal to the card’s credit limit. In many cases, this can be as low as a few hundred dollars or as high as several thousand. This deposit is placed in an escrow account, and is used to “secure” any debts you incur on the card. If you default on your credit card debt, the issuer has this money in reserve, which can be used to settle the bill. If you pay your credit card bill as agreed, your security deposit remains in the escrow account.

Many secured credit cards allow you to request a refund of your security deposit after establishing a strong payment history, but in all cases, you have the ability to close your account and receive your deposit back, minus any money you owe on the card.

Because you’re coming up with a security deposit in order to get the card, you’re not considered to be particularly high risk…

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