When you first begin your journey of building credit, it's going to be extremely difficult for you to get a credit card, let alone a different form of credit like a loan. However, you will be able to get a type of credit card called a secured credit card. In this article, I’ll go over the different elements of this card type.
When you’re first getting a credit card, you presumably have no credit history. So banks and other institutions won’t know if you can reliably pay back any loans they give you. Remember, credit cards are essentially short-term loans. Because they don’t know if they can trust you with a credit card, getting a normal credit card can be difficult. This is where the secured card comes into play.
A secured credit card is a credit card that makes you provide a deposit before you can use it. This is the “secured” element. When you apply for this credit card, the bank/institution will ask you for a deposit. A deposit will be a small amount of cash you have to give to the bank. You will eventually get this cash back as long as you pay off your card balance on time and in full. The deposit can range from the low hundreds of dollars up to the low thousands. Once you put down a deposit, you can use the credit card. However, the credit limit, the maximum amount you can spend on the card, is the exact amount of your deposit. So, if you put up a $100 deposit, you can spend $100 on your card.
This is unlike a normal credit card because you have to place a deposit with your credit card issuer. Most credit cards won't ask for deposits.
A normal credit card allows you to make purchases freely, and then pay them off at the end of the month. This card does the same, so you still pay off your purchases at the end of the month, but in the case you don’t pay back what you owe, the bank will still be able to pay off your balance with your deposit.
This is different from a debit card because it doesn’t use your deposit to actually pay for things. The deposit is just a safety measure in case you don't pay off your balance. So, while the cash is there, it's not being used for transactions.
Secured credit cards are great for those who have no previous credit history, or maybe have damaged credit. You can start with a small deposit and eventually move to an unsecured card once you develop your credit score. It's a great way to build credit safely.