A credit card can help you build credit, but it can be challenging to qualify for one if you have a bad credit score or little to no credit history. If this is your case, a secured credit card may be your best option.
Since they require a security deposit as collateral, secured cards are easier to qualify for — and some lenders don't even run a credit check. Additionally, these cards are excellent credit-building tools that can help you reach a higher credit score and access better loan terms in the future.
Keep reading to learn more about how secured credit cards work and their potential benefits and downsides. Also, check out our list of the best credit cards to build credit, which includes some of the best secured cards around.
Table of Contents
- What is a secured credit card?
- Pros and cons of secured credit cards
- Secured vs. unsecured credit cards
- How a secured credit card can help your credit score
- How to choose a secured credit card
- What is a secured credit card? FAQs
What is a secured credit card?
A secured credit card is a type of card that requires a refundable security deposit. This deposit serves as collateral, and the bank will use it to cover your payments if you fail to make them.
Since they require a deposit, secured credit cards have less stringent application requirements, making them an excellent option for individuals with a limited credit history or poor credit score.
However, even though secured card issuers tend to be more lenient in their approval process, most will still check your credit report during the application process, and you could be denied if you have recent delinquencies, unpaid collections or bankruptcies, for example.
How do secured credit cards work?
Secured credit cards work similarly to unsecured ones. They have a set credit limit you can borrow from, and you're expected to repay at least a percentage of it every month by the due date to avoid late fees.
Unsecured cards also charge an annual percentage rate (APR) on outstanding balances. The rate is variable and usually a bit higher than non-secured cards, ranging between 28% and 30%.
The main difference between secured and unsecured credit cards is their collateral requirement. Unsecured cards don’t require one, while secured cards generally require a minimum deposit of around $200 — but you can sometimes deposit up to $5,000. A few financial institutions might also accept a savings account as collateral.
Another difference is the criteria lenders use to determine your credit limit. For unsecured credit cards, lenders evaluate your credit score, credit utilization ratio, income and other factors to set a maximum dollar amount you can borrow from. With secured cards, however, your deposit acts as the credit limit in most cases — so if you deposit $500, you can only borrow up to $500.
Lenders will typically upgrade your secured credit card account to an unsecured line of credit after six to 12 months of making timely payments. Once you’re approved for an upgrade, lenders will usually also refund your deposit and raise your credit limit.
Pros and cons of a secured credit card
Some of the benefits and potential downsides of secured credit cards include:
- Have higher approval odds for borrowers with poor or no credit history.
- When used responsibly, they can help raise your credit score and make it easier to qualify for other credit accounts.
- Most issuers will automatically return your deposit after about six to 12 months of timely payments.
- A few cards may offer bonus points or cash back on popular spending categories, such as dining or gas.
- Require a security deposit (usually of at least $200) once you're approved.
- Low credit limit determined by your upfront cash deposit in most cases.
- Approval isn't guaranteed, especially if you have recent negative items on your credit report like bankruptcies or collections.
- Usually offer less attractive rewards and benefits compared to unsecured credit cards.
Secured vs. unsecured credit card
The main difference between secured and unsecured credit cards is the security deposit requirement, but here are some other things to consider:
How a secured credit card can help your credit score
A secured credit card can improve your credit score if you pay the bill on time every month and don’t surpass your credit limit.
Paying your bill — especially if you pay it in full — on or before the due date, can help you establish a solid credit history if these payments are reported to the main credit bureaus: Experian, Equifax and TransUnion.
These agencies collect information about your payment history from banks, credit card companies or public records. The data is then compiled into a credit report that lenders use to assess your creditworthiness — that is, how likely you are to repay borrowed funds on time.
Raising your credit score increases your approval odds for some of the best credit cards in the market. It also grants you access to better loan terms, such as lower interest rates and higher credit limits (without the need of a security deposit). On the other hand, a single late payment of 30 days or more can lower your credit score by over 100 points.
However, keep in mind that paying your bill on time isn't the only factor that impacts your score. How much you spend monthly on your secured card can also make or break your creditworthiness.
Experts recommend keeping your credit utilization ratio (the amount of available credit you use, expressed as a percentage) below 30%. That means that if you have a $200 limit, you should spend no more than $60 each month. If you spend more than that, you should pay down your balance in full or enough to lower your credit utilization rate to less than 30% before your statement closing date.
How to choose a secured credit card
Here are the main factors to keep in mind when comparing secured credit cards:
Security deposit policy
Before applying, read the card's security deposit policy carefully. Most cards require a minimum deposit of around $200 that you have to pay upon approval. If you don’t, your application will be rejected, which can damage your credit score. However, some issuers may give you up to a month after approval to pay the deposit in full or in installments.
You should also check the issuer's accepted payment methods for the deposit. Most issuers accept online bank account transfers, checks or money orders. Some may also allow you to pay with cash at a local branch.
Additionally, consider whether your security deposit will determine your credit limit. While this is the case with most secured credit cards, there are a few cards that offer a higher credit limit than your security deposit. For example, with the Capital One Platinum Secured Credit Card, some applicants may get a starter credit line of $200 with only a $49 deposit.
Credit bureau reporting
If you're trying to bolster your credit score, you must pay your card on time. However, it's also important to get a card that reports your payment history to all of the credit reporting agencies.
Most lenders report your account activity to all three bureaus, but a few only report it to two, which means one of your three credit reports won't include your secured card's payment history.
To check if a lender reports to the three major credit bureaus, read the card’s rates and fees documents or contact customer service and ask.
Make sure to choose a secured credit card that can be upgraded (also called graduated) to an unsecured credit card. Many issuers will automatically upgrade your card after around six to 12 months of on-time payments.
If your lender doesn't offer this option, you'll be forced to close your account if you want to get your security deposit back. Closing a credit card isn't typically recommended because it impacts your credit score by reducing the length of your credit history and the amount of available credit, both of which impact your credit score.
Rates and fees
Since you’re already providing a security deposit, consider avoiding cards that also charge an annual fee. Some secured cards may have annual fees, which are often charged upfront and deducted from your credit limit. This means that, if you're approved for a $200 credit limit on a card with a $25 annual fee, you would only be able to charge up to $175.
It's a good idea to compare annual percentage rates (APRs) and other fees between cards. However, keep in mind that most secured cards have similar APRs of up to 30%. And even if you find a card with more affordable terms, you should still aim to pay your monthly bill in full by the due date. This way, you avoid paying interest and racking up debt over time.
Rewards and other perks
While uncommon, a few secured credit cards offer cash back (or points) and other benefits. However, they usually won't match those offered by non-secured cards. However, most secured cards offer the option to upgrade a non-secured version — with more rewards and perks — once you show enough of a history of timely payments.
What is a Secured Credit Card? FAQs
Do secured credit cards build credit?
How long does it take to build credit with a secured credit card?
Is a secured credit card worth it?
Do you get your money back when you close a secured credit card?
Summary of Money’s What is a Secured Credit Card?
A secured credit card is a type of credit card that requires a security deposit. Unlike a prepaid card or debit card, the deposit on a secured card isn't spent when you make purchases. Instead, it's put aside by the issuer as collateral in case you fail to make your monthly payments.
Since they require collateral, secured credit cards have higher approval odds than unsecured cards, which makes them an excellent option for people with a limited or poor credit history.
However, these cards have some drawbacks, such as higher interest rates and fewer perks than unsecured options. But by using them responsibly, cardholders can establish a good credit score over time and gain access to better financial products down the line.