Traditional credit cards are unsecured, meaning that repayment is backed only by the promise of the borrower. This can be risky for lenders, as they have little recourse in the event that borrowers cannot pay off their bills. For borrowers that present too great of a risk, lenders might offer a secured credit card, which is backed by collateral such as a cash deposit. Here’s a look at how secured cards work and the typical interest rates they charge.
How Secured Credit Cards Work
Secured credit cards can be the best credit cards to rebuild credit, as they are offered to people who can’t qualify for a traditional unsecured card based on their bad credit history. Secured credit card customers have to put up a cash deposit, often in the $300 to $500 range. Your credit line will usually be the amount you put up as collateral, although it can be higher. You cannot use this amount to pay off any amounts you charge to the card as you work on building credit. Your deposit is strictly your collateral for the card issuer.
Typical Rates on Secured Cards
Because secured cards are extended to those with lower-tier credit, lenders take on additional risk in issuing them. On top of the required collateral, some secured credit cards have higher interest rates, particularly those offered by national banks. For example, the Wells Fargo secured credit card charges a 20.74% APY as of Aug. 26, 2018, whereas the BankAmericard secured credit card charges a 21.99% APY.
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Factors Affecting Secured Credit Card Rates
Credit card interest rates are a risk-reward proposition for issuers. Lenders generally increase rates when they take on higher risk, such as when they offer unsecured credit to borrowers with low credit scores. However, secured cards take some of the risks out of the hands of lenders, because borrowers must put up cash as collateral. Thus, rates are often lower than on the higher-risk unsecured cards. Borrowers also have to set rates to be competitive in the overall marketplace, as borrowers are better off using cards with lower interest rates.
Types of Secured Card Rates
Most secured credit cards don’t offer benefits such as rewards points or miles, as many unsecured credit cards do. However, rates can vary based on the category in which a secured credit card competes. Low-rate cards, such as the Digital Credit Union secured card, carry rates as low as 13.25 percent. Some cards don’t require a credit check, though. The Green Dot Primor secured credit card, for example, has no minimum credit score requirements and offers an interest rate of 13.99 percent.
What Is a Good Secured Card Rate?
As with all financial products, the best rate for you depends on your needs. If you want to bank with a large multinational bank, such as Bank of America, you might have to pay a rate over 20 percent. If you’re willing to bank with smaller institutions, low-rate or no credit check cards could offer rates in the low teens.
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