Q:

How does a secured credit card work?

A:

Quick Answer

A secured credit card is a card with a balance guaranteed by a cash deposit instead of the customer's credit history. The credit limit is typically equal to the deposit, and the card functions just like any other credit card. If the customer defaults on the debt, the deposit is used to pay off the balance, eliminating the risk for the issuer.

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Full Answer

Secured credit cards are commonly used to rebuild or establish credit. If a consumer's credit history is insufficient or damaged enough to prevent him from getting a traditional credit card, a secured card may help him establish a new payment history and improve his credit score.

The deposit required to open a secured card is held by the issuing institution. Typically, the starting credit limit is anywhere from 50 percent to the full amount of the deposit, although some companies may offer higher limits as an incentive. Over time, if the customer establishes a positive payment history, the issuer may raise the limit substantially. Ultimately, the customer may be allowed to graduate to a normal credit card or receive a refund of the deposit. If the card is closed for any reason, the deposit is returned to the customer, less any amount needed to cover outstanding balances or fees.

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