A credit card is a very innovative service that has been developed on the basis of the concept of credit creation. Credit card companies have started fulfilling the role of lenders and banks, and financial organizations.
Credit cards are also probably the first type of ‘plastic’ money or digital money. There are several classifications of credit cards like secured credit cards or prepaid credit cards, etc. Each type of card has a different process of application and operation. Hence, before applying for one, it is essential to understand the working of a card and its application.
What is a Secured Credit Card
A secured credit card, as the name suggests, is a credit creation that is backed by a security. However, in case of a secured credit card, the security or collateral that is pledged is necessarily an amount of cash deposited in the credit card company. This account is known as the deposit account. It is owned by the card holder, but is pledged to the credit card company. The credit that is used by the card holder is created by the company on the basis of the deposit account, which is treated as a collateral. It is mandatory for the credit card holder to deposit 100% to 200% of the credit value, in the deposit account.
For example, if a person wants to have the credit range of his secured credit card between $500 to $1000, then ideally a sum of $1000 must be put down in the account. It must be noted that the total amount of payments cannot exceed $1000.
Applying for a Secured Credit Card
Choosing and applying for the right secured credit card is all about doing calculations. The first step in the process of application is to collect the information of all facilities that are offered by credit card companies. Then using earlier receipts of purchases, calculate the monthly expenditure that is to be incurred and paid, with the help of the secured credit card, say a $1000.
The most important thing is to consider the service charges levied by the company. These charges must not exceed your budget and the daily expenditure, else the transaction becomes too costly. For example, for a credit limit of $1000, the credit charge must be about 11% of the cost of transactions, conducted during the month.
Repayment and Default
This is the most crucial step in the process of application, if the secured credit card is in its grace period and consequences a default. The grace period is the period during which the credited amount along with service charges should be paid to the credit card company. It is very important to choose a reasonable period. A very good sounding plan usually has an unreasonable and short grace period. Hence, beware about the span of grace period available.
The consequences of a default differ from situation to situation. Most of the time upon default, the deposit account is confiscated irrespective of the amount spent through the secured credit card. Some credit card companies do not return the deposit account, even after the bill is paid to the company.
Many credit card companies have started the facility of online application. The applicant has to however visit the office of the credit card company for verification and signing of the agreement. Although it is a credit creation facility, a credit card is a contract, hence it is important to carefully read the terms and conditions of the facility before signing the agreement document. The breach of this contract by either parties has serious consequences.