How a secured card's security deposit works


Opening Credits
Columnist Erica Sandberg
Erica Sandberg is a prominent personal finance authority and author of "Expecting Money: The Essential Financial Plan for New and Growing Families." She writes "Opening Credits," a weekly reader Q&A column about issues for people who are new to credit, for

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Question Dear Opening Credits,
I just created my account at Bank of America several months ago, and got an offer for a credit card via email. I thought it might be helpful, so I applied. I was asked to pay a certain amount of money to set the credit limit (which would be my credit limit for a month). When I applied, I thought it might be a kind of deposit. Now I have no idea what I paid. Do you think I can get it back when I cancel the credit card? – Gang


Dear Gang,
From your description, I’m almost certain that you applied for Bank of America’s secured card. This bank – like most financial institutions that offer credit cards – offers a variety of products, each one designed for different needs and levels of creditworthiness. After you applied and were approved, you sent in a security deposit. You’ll get it all back when you close the account with zero balance due.

Here is how it all works – and why you may want to stick with this account for a while.

The card you have is a type of secured card, designed for people who either have not established a credit profile yet or who have experienced past credit problems. For example, applicants may have charged their credit cards to the hilt, have a long pattern of paying accounts late, owe money to collection agencies or have filed for bankruptcy protection. In such cases, the person’s credit scores (which are generated from the data listed on credit reports) would be negatively affected. A new credit issuer would be rightly hesitant to grant an unsecured credit card to someone with a bad score. After all, it indicates that the applicant is a risky customer!

Secured cards can come to the rescue. The issuer requires a certain amount of money to be put down as security. In exchange, the issuer offers a credit card for the person to use. This particular card’s minimum security deposit is $300 and the charging limit is determined by income, current debt load and the amount of the deposit. Secured accounts usually have annual fees and higher-than-average interest rates, as does this card. It costs $39 a year and comes with an APR of 20.49 percent.

If you pay your bill on time (and in full), all is well. The positive activity will be reported on your credit file and will help your credit scores rise. In as little as a year, you can really hike those numbers up. However, if you use the card, but run up a debt and allow the account to go seriously delinquent, the issuer will not just report the delinquencies (which will hurt your scores), but will claim the amount due from the funds held in reserve.

So the question is, do you need this kind of credit card? If your credit scores could use a boost or if you are just beginning to build a credit profile, a secured card can work beautifully. Just manage it responsibly and all you’ll be out is the annual fee, which is actually quite reasonable. The interest rate won’t matter as long as you pay your bills off completely every month.

Conversely, if you don’t want or need the card because you qualify for something better, contact the bank immediately. Because you haven’t used it yet, you don’t owe a balance. That means the entire security deposit you sent should be reimbursed, minus any fees.

See related: 7 questions to ask when choosing a secured card

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Published: April 13, 2016

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Updated: 10-24-2016

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