No. of Recommendations: 5
Isn't the CD used as collateral in the case of a person defaulting and not paying on the credit card?

Yes, and in fact, the card company generally has to go through a bunch of hoops in order (i.e. waiting for the customer to be at least 6 months delinquent (thereby foregoing 6 months of collecting interest on the loan), writing off the loan, and possibly suing the borrower to get a judgement, depending on the state's laws) in order to seize the collateral. So, even if the borrower is perceived to be 'borrowing against their own money' - there are a lot of costs to the lender in order to claim that money from the borrower in case of default.

For the normal user, they would put charges on the secured credit card, make a payment, and possibly carry a balance. If they do carry a balance on the card, the 9.9% interest rate is the cost of the financial institution loaning money to the secured credit card user.

The CD has little to do with the interest rate. It is being held as collateral in the event the person defaults. 9.9% is a decent rate, so I'm guessing the financial institution is giving a discount on the credit card interest because they do have the collateral if something goes south.


Since those who get secured cards generally only do so if they can't get an unsecured card (usually due to poor or no credit history), 9.9% is probably a significant discount from the 30%+ rates that they would probably pay for an unsecured card.

And of course, if the borrower didn't want to pay interest, they could always close the credit card account, close the CD and use the cash from the CD to make their purchases. If the borrower is carrying a balance on a secured card, it's their choice in how to spend their money.

AJ
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