How is a secured credit card different from a regular credit card?

@sibyl 

A secured credit card is different from a regular credit card in terms of how it is obtained and the underlying financial arrangement:

1. Security Deposit: A secured credit card requires the cardholder to provide a cash deposit as collateral, typically ranging from a few hundred to a few thousand dollars. This deposit acts as security for the credit limit on the card. In contrast, a regular credit card does not require any security deposit as it provides credit based on the applicant's creditworthiness.
2. Credit Limit: The credit limit on a secured credit card is usually equal to or slightly lower than the amount of the security deposit made. For example, if a person makes a $500 security deposit, their credit limit will likely be around $500. In contrast, a regular credit card assigns a credit limit based on the applicant's credit history, income, and other factors.
3. Building Credit: Secured credit cards are often used by individuals with limited or poor credit history to rebuild or establish credit. The activity on a secured credit card is reported to credit bureaus, allowing cardholders to demonstrate responsible financial behavior. Regular credit cards also contribute to building credit history, but they are more commonly used by individuals with established credit.
4. Application Approval: Secured credit cards have higher approval rates compared to regular credit cards. Since the security deposit minimizes the risk for the card issuer, they are more likely to approve applications from individuals with limited or poor credit histories. Regular credit cards have stricter approval criteria and require a better credit score for acceptance.
5. Fees and Interest Rates: Generally, secured credit cards have higher annual fees, application fees, and interest rates compared to regular credit cards. These additional costs act as safeguards for the card issuer against default or nonpayment.

Ultimately, the primary difference lies in the requirement of a security deposit, the purpose of providing credit to individuals with limited credit history, and the associated fees and interest rates.

@sibyl 

Some additional differences between a secured credit card and a regular credit card include:

Credit Reporting: Secured credit cards typically report to credit bureaus just like regular credit cards, allowing cardholders to build or improve their credit history. This can be particularly beneficial for individuals who are trying to establish credit for the first time or repair a damaged credit history.

Credit Limit Increases: With a secured credit card, the credit limit is typically determined by the amount of the security deposit. However, some secured credit card issuers may offer credit limit increases over time if the cardholder demonstrates responsible use of the card. Regular credit cards may also offer credit limit increases, but these are typically based on factors such as income and creditworthiness.

Availability: Secured credit cards are generally easier to obtain than regular credit cards, making them a good option for individuals who have been denied a regular credit card due to a lack of credit history or a low credit score. Regular credit cards often require a higher credit score and income level for approval.

Credit Card Benefits: While both secured and regular credit cards can offer benefits such as rewards programs, extended warranties, and fraud protection, secured credit cards may have more limited benefits compared to regular credit cards. Regular credit cards often come with a wider range of perks and rewards due to the higher creditworthiness of their users.

Overall, a secured credit card can be a useful tool for building or rebuilding credit, but it does come with some limitations and additional costs. As the cardholder establishes a positive credit history, they may become eligible for regular credit cards with higher credit limits, lower interest rates, and more perks.