Banks that offer secured credit cards require cardholders to place a security deposit in a collateral account, which is usually a savings account. People who cannot qualify for regular unsecured credit cards because of bad credit or no credit history use the secured credit card to establish a good credit history. The cardholder uses his own money to provide collateral for all or part of his credit amount. Although a checking account with a bank might be required to apply for its secured credit card, the bank will require you to open and maintain the collateral account -- which will be something more restrictive than a checking account -- when your application is approved.
Security Deposits and Collateral
Banks do not use checking accounts to hold security deposits as collateral for secured credit cards. By definition, you can withdraw money from a checking account at any time. This, of course, gives the bank little security. On the other hand, if you use a collateral account to secure a credit card, you can only access funds in the account through the use of your secured card, for which you pay interest and fees. The bank controls the collateral account and may exercise its rights over the account to collect fees or other debt.
Banks use different types of savings accounts to hold the collateral for secured credit cards. One major commercial bank distinguishes its “collateral account” for secured credit cards from checking and regular savings accounts. Another bank, which provides financial services to military members, requires a certificate of deposit, or CD, account to secure the credit limit and allows account holders to earn interest. Account holders may add to the account, although the additions do not increase the credit card limit.
When you apply to your bank for a secured credit card you might be required to place the security deposit for the card in your checking account or a current savings account while your application is processed and until the funds are transferred to a collateral account. Some banks require you to open a savings account with them before you can apply for a secured credit card. Others will not approve people who have recent bankruptcies. Although you are borrowing your own money, you have to make monthly payments as with any credit card.
Some secured credit cards have monthly or annual fees, which can range from fair to exorbitant, and most have higher interest rates than unsecured cards. The U.S. Federal Trade Commission warns consumers that some credit companies charge application and processing fees that are not refunded if you are denied a card. The FTC also warns about secured credit card advertisements that point you to “900” numbers, which charge you fees for the call.
- U.S. Federal Trade Commission: Secured Credit Card Marketing Scams
- Wells Fargo: Wells Fargo Secured Card
- Bank of America: BankAmericard Secured Credit Card – Terms and Conditions
- USAA: USAA Secured Credit Card
- Fifth Third Bank: Fifth Third Credit Building Program
- The New York Times: Secured Credit Cards – Not Everyone Qualifies
Gail Sessoms, a grant writer and nonprofit consultant, writes about nonprofit, small business and personal finance issues. She volunteers as a court-appointed child advocate, has a background in social services and writes about issues important to families. Sessoms holds a Bachelor of Arts degree in liberal studies.