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A credit instrument issued by banks against a collateral cash deposit is called a secured credit card. The cash deposit becomes the credit limit. To give an example, if you deposit $400 in the account, your credit limit is $400. To obtain a secured credit card, an account holder needs to fill out an application form. The applicant also agrees to deposit a sum of money every month to his account. However, it helps to shop around a bit before getting a secured credit card. Read the fine print on what various banks are offering. Set up fees and annual fees vary from institution to institution. Some banks charge application fees, which use up your entire deposit. Compare the fees charged by various banks and institutions. A good number of credit Unions offer secured credit cards with low annual fees and no setup fees.

There are many merits of a secured credit card. Most people obtain such a credit card to improve their credit rating. It is the first step in regaining a good rating especially for those people who have been through a bad financial phase. As the credit balance is limited, the chances of debt are lower. Moreover, the credit balance also acts as collateral. When the credit card is used every month for purchases and the same are duly paid off before the due date, a positive reference for credit is established. The secured credit card can also be used to create what is called a savings nest egg. A nest egg refers to money that has been set aside for a specific purpose. When the secured cardholder adds to his savings every month, he earns more interest. This increase in savings deposit leads to increase in his credit limit as well. Thus, the secured credit card holder can repair his credit rating and establish sources of interest income in just one go.

Secured credit cards do have their limitations. Most banks do not allow credit limit of more than $5,000 even if the amount deposited into the account is higher. Most of them do not grant any grace period for late payments. Late payments are deducted from your credit limit. To be on the safe side, always make payments on time and do not purchase that which you cannot pay in full for. This will help you stay in control of your debts.