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Have you ever seen a platypus? It is a small furry brown creature that looks like an odd hybrid between duck and a beaver, and it even lays eggs. Although unusual and somewhat rare, it is ideally suited for the wetland environment of eastern Australia.
Secured credit cards are also rare and unusual things that are very well suited to particular circumstances. Some may think of these products as a cross between a debit card and a credit card, but like the platypus, the reality is a little bit more nuanced.
How Secured Cards Work
Secured credit cards were designed for the consumer that cannot qualify for a standard, non-secured credit card. In many cases, applicants need only to verify their identity and any bankruptcies must be discharged. They are similar to unsecured credit cards, except once you are approved, cardholders must submit a refundable security deposit. Some will require you to link your checking account to the card and others will simply let you make a deposit to cover the amount. In most instances, the amount of the security deposit offered will result in an equally-sized credit limit, but some secured cards will offer credit lines in excess of the cardholder's deposit.
Nevertheless, cardholders must make a payment to their account every month, and the security deposit will not be used unless the cardholder defaults on their payments or happen to go over their credit limit. Like traditional, unsecured credit cards, secured cardholders can avoid interest by paying their entire month's statement balance by the due date, or they will incur interest if they choose to carry a balance. Interest rates on secured credit cards are almost always higher than interest rates with unsecured cards, so you definitely want to avoid wasting your money on interest, if possible.
Credit Reporting. What's great about secured credit cards -unlike prepaid debit cards- is that your account activity will be reported to the three major credit bureaus. Reporting your payments to the major credit bureaus is vital for customers who are trying to re-establish a strong credit history. Having a secured card can also offer other valuable benefits normally found in traditional credit cards that are lacking in prepaid debit cards. For example, some secured credit cards offer car rental insurance, which is incredibly valuable because it can save you money since you won't have to purchase additional insurance from car rental companies.
Financial Protections. Since these products are considered "credit cards" from a regulatory standpoint, cardholders receive more protections than they would if they carried a prepaid debit card. In addition, secured cardholders are only liable for a maximum of $50 in the event of a fraudulent activity if your card is lost or stolen, and many card issuers go beyond the law to offer a zero liability policy. Furthermore, customers who pay for goods or services they never receive can request a chargeback, which is a protection not available to debit card users.
Fees. Most secured cards will have an annual fee, but they remain relatively reasonable, under $50. Some card fees that aren't so reasonable are the numerous fees for using out-of-network and even in-network ATMs, reloading fees, purchasing fees, and more that you won't find with an unsecured card.
Once secured cardholders have established a good track record by making on-time payments for at least a year, they will have a much higher chance of qualifying for an unsecured card with that same bank. Once you're ready to close the secured card, as long as the account is in good standing, cardholders will receive a full refund of their entire security deposit. There is a common theory that consumers can transition from a secured card to an unsecured card, but it doesn't quite work that way.
Who Needs a Secured Card?
These cards are typically used by those who have very poor credit, for one reason or another, or for those who have no credit history. The typical poor-credit applicant has gone through a bankruptcy or have just defaulted on other loans in some way. In contrast, those who simply have a limited credit history, such as young adults or recent immigrants, should be able to find an unsecured credit card that meets their needs without requiring a security deposit or an annual fee.
Secured cards fill a niche between the time that people have truly bad credit and when their credit starts to rebound significantly. Like the animal world, the financial world is full of unique things that fill a specific niche unoccupied by others. And if you are someone with a troubled credit history, you will likely find a secured credit card to be even more fascinating than a furry mammal from Australia that lays eggs.
Here is our list of suggested secured credit cards by our partners:
USAA Secured Platinum American Express Card- This is one of out favorite secured credit cards because it's processed by American Express and comes with excellent benefits the other cards don't come with such as auto damage collision waiver coverage and travel accident insurance. The APR offered with this card is the lowest of all secured cards at 9.90% and the annual fee is $35. You must be a USAA member to apply.
First Progress Platinum Prestige MasterCard® Secured Credit Card- This secured credit card has an on-going interest rate that is much lower than the Capital One Secured Credit Card, at 11.99%, while the annual fee is higher at $44. Those who fail to pay their bill on time will have to pay an APR of 14.99%, so make sure you always pay on time to hang on to that great 11.99% interest rate.
Capital One® Secured MasterCard®- This secured credit card gets you free access to your credit score using the Capital One Credit Tracker and there is no annual fee. Security deposits can be in the amount of $49, $99, or $200, depending on creditworthiness. Cardholders could qualify for a credit line increase based on their repayment history, and the on-going APR is 24.99% (Variable).
* Editorial Note: This content is not provided or commissioned by the credit card issuer. Opinions expressed here are the author’s alone, not those of the credit card issuer, and have not been reviewed, approved or otherwise endorsed by the credit card issuer. This site may be compensated through the credit card issuer Affiliate Program.
*The content in this article is accurate at the publishing date, and may be subject to changes per the card issuer.