Access to credit is nearly essential in the modern age. Despite the advice of some popular commentators, building a record of regular and responsible use of consumer credit is important since it impacts more than just the ability to obtain a loan.
Credit scores are used by landlords, insurance companies and even prospective employers, and a solid history can open many doors aside from merely borrowing money.
Yet it is also easy to fall into a downward spiral of increasing debt that may lead to delinquencies or even insolvency, whether by lack or experience or due to setbacks like a job loss or medical bills that can lead to serious damage to a borrower’s credit score. For folks like this seeking a fresh start, or for younger consumers with little or no credit history of their own, a secured credit card account can be an excellent tool for building or rebuilding a solid credit foundation.
A secured credit card looks and works just like a regular Visa, MasterCard or Discover card that can be used to make purchases in the same way, either in person or online. When using the card, the holder borrows the funds from the issuing bank, receives an account statement each month, and must then pay the balance due monthly. Just like regular cards, secured accounts incur no interest as long as the entire balance is paid in full by the due date. The fundamental difference is the requirement for the holder of a secured card to post collateral in advance.
Although no one is entirely certain who came up with the idea, industry lore traces the origin of secured credit cards to a handful of San Francisco Bay Area credit unions in the late 1970s. By 1981, seven credit unions banded together to issue secured credit cards carrying the Visa brand that required posting collateral in a savings account at the institution. These early products carried a credit limit of between 50% and 80% of the collateral deposited.