The Basics
Imagine you’ve had some mishaps with money in the past. Maybe you didn’t pay a few bills on time, or perhaps you have a history of bad debt. Your credit score, which is like a financial report card, may not be looking too great because of this. Now, when you want to borrow money or get a new credit card, lenders might be hesitant. They’re thinking, “Can we trust this person to pay us back?”
This is where a secured credit card comes into the picture.
How Secured Credit Cards Work
- Upfront Deposit (Security Sum): You give the bank a certain amount of money upfront, called a “security sum.” This is like telling the bank, “Hey, hold onto this money for me. If I mess up, you can use it.”
- Credit Limit: Whatever amount you give the bank as the security sum, that becomes your credit limit on the card. So, if you deposit £500, you can spend up to £500 on your card.
- Using the Card: It works just like any other credit card. You can buy things, but there’s a twist – the bank still has your initial deposit. So, if you fail to pay back what you owe, the bank can take money from your deposit.
- Making Payments: Each month, you need to pay at least the minimum amount you owe. If you pay off everything you owe each month, you won’t be charged any extra interest. But if you don’t, then interest starts adding up. Also, if you use the card to get cash, you’ll be charged interest straight away.
- Improving Your Credit Score: Over time, if you’re good with your secured credit card, like paying your bills on time, it can help improve your credit score. Remember that financial report card we talked about? It starts looking better. The end goal here is to show lenders that you can be trusted, so in the future, you can borrow money more easily and at better rates.
- Getting Your Deposit Back: When you decide to close the account or move on to a regular credit card, the bank will return your security sum, as long as you’ve paid off any money you owe.
Why Aren’t These Cards Common in the UK Anymore?
Good question! Even though these cards are still popular in the US, they’ve become rare in the UK. But NerdWallet has a good list of the best available in August 2023.
In essence, a secured credit card is like training wheels for people who want to rebuild their financial reputation. They put down some money to prove they’re serious, and in return, they get a chance to demonstrate they can manage credit responsibly. For some people, it’s a way to rebuild trust in the financial world.