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Secured credit card FAQs

Secured credit cards can be a great way for someone with bad credit to improve their credit score. These cards are offered by a variety of banks, and typically require a person to leave some type of collateral in order to qualify for the card.
1. How much collateral do I need for a secured credit card?
Typically, a bank requires a borrower to leave enough collateral to cover the entire credit line that is extended to the borrower. For example, if a card has a credit line of $1000, the borrower would need to leave at least $1000 on hand with the bank in order to keep the account open.
2. Why do I need a secured credit card? Secured credit cards are primarily used to rebuild credit. They are usually used by people who have gone through a bankruptcy or have no other credit history. These cards are often a last resort for a borrower who cannot get a bank to issue him or her any other type of credit. By showing that a bank has agreed to extend credit to you, your credit used to credit extended ratio improves, which in turn can increase your credit score. Furthermore, since each on-time payment on the card is reported to the major credit agencies, your credit score will continue to improve as you make payments each month.
3. Can I spend the money I use as collateral? While there are some exceptions, the general answer is no. A secured credit card is secured by the money deposited with the bank. In order for you to spend the money, most banks will require you to close down the credit card account first.
4. What happens if I miss a payment? This depends on the bank policy. In some cases, missing a payment immediately makes the card inactive. In other cases, a bank will simply charge a penalty fee and keep the account open. Be sure to read the terms of your card carefully to find out what your bank will do.
5. Can I convert a secured card to an unsecured card? In many cases, a bank will increase your line of credit and/or return the money that is being held in escrow if certain conditions are met. While the exact terms vary between banks, it is very common to have to make full, on-time payments for at least six months and show improvement in other areas of your finances. Once you meet the conditions, some banks will refund your collateral deposit and in some cases increase the credit limit on the card. This effectively converts the card from secured to unsecured.

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