For many people, obtaining a secured credit card is a solution to credit challenges such as lack of credit history, bankruptcy, poor money management and other financial problems. The basic idea that makes secured credit cards work for just about anyone is that the lender incurs zero risk. One major attraction for the consumer is being able to build or rebuild a credit history.
When a person obtains a secured card, the lender will require that they put some type of security interest up as collateral, usually a cash deposit that is equal to the charging limit of the card. A bank or credit union will have the borrower leave that amount untouched in a savings account. They can earn interest on that deposit and they will receive a bill each month for any charges they have made. The bill needs to be paid either in full or in part. If the entire bill is not paid, the bank will charge interest, just like a regular credit card.

Another benefit to having this type of card is that the lender may report a transaction record to the major credit reporting agencies. This will build or help rebuild the consumer’s credit record. For a young person, obtaining a secured credit card may be their only option for building a new credit record. Persons who have gone bankrupt may also wish to use the benefits of a secured credit card to rebuild their credit record.

If the consumer defaults on a payment, the lender can use funds from the customer’s secured account to make the payment, thus incurring no risk. The lender may put a hold on the consumer’s ability to use their secured credit card until the arrearage is resolved, or they may close the account and seize the security deposit to pay unpaid charges.

Another type of secured credit card is the prepaid debit card that is available for purchase at many retailers, such as a grocery store. Since these are paid in advance, there is no security account required and no billing. They are “secured” by the prepayment and set limit. Some of these cards have a capability for reloading with more money. When the card is fully charged down, it either is no longer available for use or it must be reloaded with additional cash. These make excellent gifts and they are nice to have if the consumer is unable to obtain a credit card any other way. They are not true “credit” or “debit” cards, because they are a very simple pay-as-you-go card, but they do mimic the standard credit or debit cards and can be used where regular cards may be used.

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