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Not every individual will qualify for regular unsecured credit cards. Those with bad credit or no financial track record may find that they pose too big a risk to get approval for an account. In some cases secured credit cards may be used as an alternative. What are these products and how do they work?
What is a Secured Credit Card and How Does it Work?
A secured credit card works like any other card. Its difference (and its name) comes from the fact that it can only be taken out if the user places a deposit in an issuer held account to secure their borrowing. The credit limit that comes with the card is usually based on this deposited sum. Generally, the user can charge up to this limit although in some cases their limit may be set lower.
This secured deposit is taken by the card issuer to minimize their risk. If the card user doesn’t make a payment or defaults on their account completely, then the company has the deposited sum to fall back on so they won’t lose any money. This allows them to give out credit cards to people that might not otherwise qualify for them.
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