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The following is a WalletHub interview with Associate Professor of Economics and Director of the Center for Economic Education (CEE) Dr. Sahar Bahmani. Link to Wallethub article: https://wallethub.com/credit-cards/secured/?v=20#Sahar_Bahmani
Do banks and credit unions make money off the security deposits from secured credit cards?
Yes, of course they do, because they come with a higher APR as they’re designed for at-risk individuals. A secured credit card requires a cash collateral deposit, and that amount becomes the credit line for that account -- so if you deposit $800 into the account, you can charge up to $800. Using a secured card can help you establish credit or improve your credit health, which may help you qualify for an unsecured card down the road.
Why don't more secured credit cards pay interest on your security deposit?
Secured credit cards don't pay interest on your security deposit, because it is essentially a line of credit. Secured credit cards are recommended for small purchases that you can pay off each month, in order to demonstrate that you are able to charge purchases responsibly by then paying off your balance in full and on time. Therefore, you need to prove yourself -- the bank doesn't owe you interest on a security deposit that is acting as a line of credit.
Why aren't there more secured credit cards available?
On a secured credit card, when a cardholder fails to make their regular payments, the card issuer can use the funds held in the security deposit to cover the defaulted amount. When and how the funds in the security deposit savings account are used can vary between cards and card issuers.
How does a secured credit card with no annual fee make the issuer money?
Many secured cards have higher APRs than unsecured cards. The reason is simple -- because secured credit cards are meant for those individuals who are hoping to build credit or rebuild credit. Therefore, a customer who isn’t creditworthy is higher-risk, and typically, this customer will pay a premium to establish or rebuild credit.