Getting your hands on a credit card is really difficult if your credit scores are low. If you are one of those who have bad credit or no credit, there would be very few people willing to issue a credit card to you. For such cases, where the credit score is bad, companies usually issue secured credit cards. So, what exactly is the concept of a secured credit card and how is it different from the normal credit card?
In order to get a secured credit card, you need to deposit some cash with the credit card issuer in order to get the credit card. It is just like giving some security or guarantee to the issuer against fraud or bad credit that you have been known for in the past. The deposit is basically used as a collateral against credit card defaults and if you happen to make purchases on your card and default on the payment, the card issuer may keep the deposit- there are certain rules which guide the usage of this collateral, however. In general, a secured credit card has a credit limit that lies anywhere between 50% and 100% of the deposit that might have been made by you.
There are certain good things about secured credit cards. Apart from being issued to you in a situation wherein you wouldn’t have been entitled to a credit card, secured credit cards also help in improving your credit scores. If you hold a secured credit card, your purchases and payment routines would be directly reported to the credit bureau, which includes it in your credit report- thus improving your overall credit score (if you are making timely re-payments). Another good thing about secured credit cards is that you won’t have to worry about repayment agents knocking your door in case of a default. Even if you default by chance (or by convenience), the issuer will deduct money from your deposit. Just like any other bank would do, the deposit that you would have made with your credit card issuer will fetch you some interest. It is just like holding a savings bank account and this interest can actually come in handy on a rainy day. In short- getting a secured credit card might give you a compulsory hedging- thus ensuring that you have some cash when you really need it!
Having discussed all this, there are certain cons associated with secured credit cards as well- the biggest one being that you will have to deposit some cash with the issuer. There might be some processing fee associated with the deposit and the interest you earn is income tax deductible. In all, the benefits you get by using a secured credit card outweigh the disadvantages and thus, if you have a bad credit score- you ought to go for it!