Secured credit cards are backed with collateral

If you are young and want to establish first time credit or if you are older but have never had credit in your name before, a secured credit card may be just the key towards helping you establish credit of your own

The first thing any lender wants to do when you apply for an account is to look over your credit report. If you have no credit history, there will be nothing on the report that indicates that you are worthy of any.:: One issue that anyone who needs credit wants answered is how do you get credit if you don't have any already? Building credit can be tricky if you do not already have credit.

There are a few ways to establish credit, but the smartest of them is for you to open a credit card account with a lender or creditor that provides a secured credit card. A secured credit card a card is "secured' by cash collateral. When you apply for your credit card account, you will provide the credit union or bank a cash deposit. Your collateral will be placed into an interest earning account in your name and as long as you have the card, the money will be kept there. In a few situations, the limit will be just half of the cash deposit amount, but normally, you will be granted a limit of nearly the total deposit amount. Your charge card will be given to you with an available cap that is no more than the amount of the deposit.

Secured credit cards differ from prepaid credit cards, where there is no collateral that secures the card. Prepaid cards can be "reloaded" for ongoing use, but they are typically regarded as debit cards and don't help you establish a credit history, although there are some exceptions to that policy. Prepaid credit cards have a limit of the amount of cash you gave the bank when you purchased the card. With prepaid credit cards, the money is actually "loaded" onto the card itself.
 

Having applied for and paid out a deposit to secure the credit card account, you will have a credit card that you might use just as anyone else might use one. A secured credit card is pretty much indistinguishable from any other "normal" credit card. You may nevertheless use a collateral-backed credit card for as long as you want, but at some point you will probably want to try to obtain an unsecured card. You will receive bills, and as long as you pay them in a timely manner, you'll be earning credit in your name and increasing your FICO score.

For a person who needs to establish a financial history, a secured charge account is a way to do it, but you do not want to own one any longer than is absolutely required, as they are just too expensive. Typical accounts are not so likely to require an annual fee for their use, and they don't tie up some of your money in a bank account that you cannot touch. Traditional accounts tend to have lower interest rates than do secured ones.