What is a secured credit card?

If you’re new to credit, or in the process of rebuilding your credit after a financial setback, secured credit cards could be a good tool for you.

Secured cards offer access to a line of credit, but require cardholders to put up a cash deposit as collateral. This limits the risk for the card issuer while giving you the chance to prove that you can be creditworthy.

Learn more about how a secured credit card works, the pros and cons of getting one and how to decide if it’s the right option for your needs.

What is a secured credit card?

A secured credit card works like a regular credit card except that the cardholder must put up a cash deposit for collateral. In many cases, the deposit amount serves as the card’s credit limit. When used wisely, secured credit cards can help people with limited credit histories or poor credit improve their credit score.

Many credit card issuers offer a secured card version of one of their popular cards. Other than the cash deposit, it functions like a regular credit card. Some secured cards allow you to “graduate” to the regular card version after several months of responsible use and on-time payments and have your deposit returned to you.

What secured credit cards are best for

Ideally, you should think of secured credit cards as a bridge to unsecured credit. Put another way, think of them as credit card training wheels. With a secured card, you’ll have the chance to prove your ability to manage an account responsibly and gradually raise your credit score. Then, you can get your deposit back and begin accessing unsecured credit products.

People who usually explore secured credit cards include:

• Young people new to credit. If you can’t qualify for a student credit card, which has less stringent qualifications but oftentimes requires enrollment at a college or university, a secured credit card is another option to consider.
• Those who have past credit missteps. If you’ve tanked your credit score, it can be difficult to find a lender that will approve you for a new card. Secured cards can act as that baby step toward rebuilding your credit.
• Adults who don’t have credit in their own name. Sometimes, when a person passes away or gets divorced, their former partner is left without any credit access. Initially, a secured card might be the only available option.

Bad credit isn’t a life sentence: Here’s how to fix and repair poor credit.

How a secured credit card works

When you open a secured credit card account, you’ll have to give the credit issuer an upfront security deposit. It is usually done electronically via a bank transfer. The money will remain in a deposit account for however long you keep the card open and often the amount will serve as the credit line. For example, if you deposit $300, your credit limit will be $300.

Because of this collateral, credit card companies are willing to extend credit knowing that if you stop paying your bill, they can just keep your deposit. Of course, your goal as a secured cardholder is to ensure that you make on-time payments consistently to demonstrate responsible credit habits. Over time, your credit score should begin to improve.

Once you’ve used the card and made regular payments for a while, some card issuers might automatically review your account, return your deposit and allow you to upgrade to an unsecured card. In other cases, you can request an account review on your own. Be sure to give it some time and track your credit score progress along the way.

Benefits of using a secured credit card

• You have a chance to build credit. Choose a secured credit card that reports to all three credit bureaus to make sure you get “credit” for all of your positive credit card behavior.
• A low credit limit means there’s no chance of running up a large balance. If you’ve had trouble overspending in the past, or it’s your first stint using plastic, the lower limit will keep you from getting into too much trouble.
• Some secured credit cards offer rewards. You can earn cash back on some secured cards every time you make an eligible purchase.

Potential drawbacks

• Some products could be predatory. Be wary of secured credit cards that have high fees, maintain a much higher than average APR, fail to report to the credit bureaus or any other unfavorable terms. At the very least, the best secured credit cards will usually be offered by banks or credit unions you’ve heard of, but do some research before you apply.
• It takes time to graduate to unsecured cards. Rebuilding credit takes time, but the length of time it takes to see progress can vary depending on where you’re starting from and how well you manage your secured card. For some people, it might take six months. For others, it could take a year or more.
• You’ll have to pay special attention to how much you spend. If your aim is to build credit, you should try to keep your credit utilization (the amount of available credit you are using) as low as you can, since it’s an important component of the credit score calculation. The challenge is that secured credit cards may come with a low credit limit. For example, if you have a $200 card limit and spend $150, you are utilizing 75% of your credit. To keep your utilization as low as possible, try using the card for small purchases or make multiple payments throughout the month so the balance doesn’t get too high.

Secured vs. unsecured credit card

A secured credit card is collateralized, meaning you put up a security deposit so that if you don’t follow through on your debt obligation, the lender can take your deposit.

With an unsecured credit card, the lender is extending a line of credit to you without collateral. That’s why they take special care to look at your credit history and ask about your income to ensure that you have a track record of responsible payment and the means to pay your bill.

Secured credit card vs. prepaid debit card

The main function of a secured credit card is to give you access to a credit line and prove that you can manage it well. Ultimately, you want to end up moving on to an unsecured credit card. A prepaid debit card, on the other hand, is a tool that replaces cash. You pay in advance to load the card and then use the card to make purchases. There is no credit activity reported to the credit bureaus and no impact on your credit score at all.

Final verdict

Secured credit cards, when used properly, can open up full access to the world of credit. Try to find a secured card with decent terms that reports to all the bureaus and includes a pathway to unsecured credit. Then, make small purchases and pay them off right away. Keep tabs on your credit score, and over time, you’ll begin to see it rise.

Frequently asked questions (FAQs)