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How does a secured credit card work?

Most credit cards are unsecured loans. They are not backed up by anything. The lender is placing their faith in you that you will repay the money they give you, perhaps because you have shown a history of faithful payments in the past.

However, you do have the option to get a secured credit card. Wondering how this works? It's very similar, but you have collateral in the form of a down payment. If you want a card with a $1,000 limit, for instance, you pay the $1,000 up front. The lender keeps that money and gives you the card.

Ideally, that money does not get used for anything. You borrow money against the limit and then pay it off at the end of the month, just like a more traditional card.

So, what is the point of the $1,000? It gives the lender confidence. You can't borrow more money than they already have. If you stop making payments, they don't lose anything. It's covered.

This can be very helpful for those who have filed bankruptcy in the past. Lenders may not want to give them traditional cards because of their low credit score, but they will give them secured cards. Borrowers can then use these cards to build up their credit score, and they can eventually get it high enough to do away with the secured card and get a traditional one again.

What this shows you is that you do have financial options after bankruptcy. Don't assume you won't. If you have run into financial issues, make sure you fully understand the bankruptcy process and the impact on your life.

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