A secured credit card can be a valuable stepping stone to financial stability and security – especially for people seeking to establish or rehabilitate their credit histories. Used wisely, secured credit cards offer access to short-term, 30-day, interest-free loans when bills are paid off in full at the end of each month. They also offer a long-term credit building solution – open accounts in good standing will stay on a credit report indefinitely! Finally, the use of a revolving credit line can be an important factor in the credit scoring equation.
First the Basics: What is Secured Credit Card?*
A secured card is a bank credit card backed by money that you deposit and keep in a bank account. That account serves as security for the card. If you don’t pay your bill, your deposit may be used to cover that debt. What is the difference between unsecured and secured credit? Unsecured credit is a loan made on the strength of the borrower’s character, past use of credit and ability to repay. Although the borrower is legally responsible for repaying the loan, to some degree the lender is making the loan on trust alone. Secured credit requires that the borrower put up collateral – assets such as a vehicle, boat, stocks or bonds, land or a home – to guarantee the loan. If the borrower defaults on a secured loan, the lender can keep the collateral.*
Why do issuers prefer to offer secured credit to riskier borrowers?*
Lenders usually group borrowers into categories according to risk. Lenders are not in business to lose money. The customer who has always repaid loans on time represents little risk. If a lender has no way to judge a borrower’s past credit behavior or if they have had credit problems in the past, a secured loan represents much less risk because the lender can keep the designated collateral if the borrower defaults.*
The bottom line?
While the underwriting, terms, and costs of any individual card can differ significantly depending on the card issuer, a number of CBA’s Credit Builder Community members have integrated the use of secured credit cards into their credit and asset building programs to help their clients successfully build credit.
Here’s what they say:
- Understand the Value Proposition
- Know the Client
- Know the Terms
- Consider your Options
- Define Your Role
- Measure & Celebrate Success