Maybe you’ve trashed your credit or maybe you’ve never built credit at all. Either way, a secured credit card is an excellent way to start building it up, so long as you manage it responsibly, of course. What is a secured credit card, you ask? Well, simply put, a secured credit card requires cardholders to put down a cash deposit that serves as (or “secures”) their credit limit. These deposits usually run around $200 to $500, but some secured credit cards allow people to put down a bigger chunk of money.
Secured credit cards are primarily meant to help people who can’t qualify for a traditional credit card or installment loan demonstrate they’re able to repay financing as agreed. The best secured credit cards, in fact, have built-in credit reviews, usually within six months to a year. If the issuer sees the cardholder has made all their payments and kept their balances low, they’ll generally offer an upgrade to an unsecured piece of plastic. But let’s not get ahead of ourselves: First, let’s break down everything you need to know about secured credit cards.
How Does a Secured Credit Card Work?
People can go ahead and apply for a secured credit card the same way they would any other card, but, as we mentioned, they’ll be required to put down a minimum security deposit as upfront as collateral. That security deposit is meant cover the issuer in case of default. Remember, secured credit cards are geared towards customers with no-to-low credit, meaning the bank considers them a risky investment and is asking for a security deposit to serve as a bit of insurance. Your security deposit generally serves as your full credit limit. So, if you put down $300, you’ll be able to spend up to $300 on the card. But policies vary by issuer to issuer and a few may approve you for a limit that’s bit higher than what you put down, at least after a few on-time payments.
How Do I Get a Secured Credit Card?
That brings us to another important component of secured credit cards: You’ll still need to be approved for both the card and a particular credit limit, so, yes, the card issuer will do a credit check. To ensure that you qualify for the best deal, consider taking these steps.
- Get your credit scores. Secured cards aren’t hard to qualify for, but you can fine-tune the process to help avoid rejection. Find out your credit score so that you apply only for cards you’re more likely to qualify for. Use Credit.com’s free credit report snapshot to receive two free credit scores, one from Experian, a major credit reporting agency, and another using VantageScore 3.0, a scoring system developed by the three major credit reporting agencies.
- Compare Cards. Shop around using Credit.com’s credit card search tool, filter your search for cards according to your credit score. Read the fine print on each offer, carefully comparing interest rates, fees, maintenance costs, penalties, grace periods and other details.
- Deposit. Put down a deposit, usually $200 to $500, which becomes your collateral.
- Learn your limit. You’ll get a credit limit, usually equivalent to your deposit. As an example, if you deposit $400, your credit limit is $400.
How Do I Use a Secured Credit Card?
After you’re approved and put that deposit down, secured credit cards work mostly the same way that unsecured credit cards do. You use the card to make purchases (up to your credit limit, of course) and you’re expected to make at least a minimum payment each month. That payment, however, isn’t covered by your security deposit. Instead, you’ve got to use other funds to cover what you owe — just as if you were borrowing money directly from the issuer. If you don’t make a monthly payment, the issuer could use the security deposit you laid out to cover any outstanding purchases.
Are Secured Credit Cards & Prepaid Cards the Same?
No — and this is a particularly important distinction to drive home. While you put an upfront deposit down to fund a prepaid card, you’re actually spending the funds from that deposit each time you swipe, similarly to how a debit card pairs with a checking account. A secured credit card, on the other hand, functions like a traditional credit card. Even though you’ve put a deposit down, as we mentioned earlier, that deposit isn’t being used to fund your purchases. You’ll have to pay them down using new funds. Moreover, while prepaid cards can seem like a useful way to budget, given they provide the same limitations as secured credit cards, they don’t build credit. So, if you’re looking for a new payment method to boost your credit scores, a secured credit card is the better fit, which brings us to …
Who Should Get Secured Credit Cards?
Even if you have good credit, there are reasons why a secured card may be a good fit for you. One of the secured card’s best features is its limitations, so you might like a secured card if you are:
- Sticking to a budget. A secured card can help because you’ll always know that you have to keep your card balance low.
- New to using credit. A secured card works like training wheels: It’s a great way to learn and get comfortable using credit.
- A parent. Parents use secured cards to teach students and young people how to use credit carefully.
- On a limited budget. A secured card helps you avoid checking account overdraft fees when there’s not much money in your checking account. With a secured credit card, you don’t have to worry whether the money will be in your account when a check lands.
- Living debt-free. If you’re avoiding the temptations of a credit card but still want to keep an active credit history, a secured card can support your goals.
Of course, secured credit cards aren’t for everyone. Let’s break down the pros and cons to help you decide if they’re your best option.
The Pros of Secured Cards
- It’s a real credit card. You can use the card at any place that accepts major credit cards. Again, unlike a prepaid card, you’re not drawing down deposited funds. Rather, you are using the card to borrow money at the terms established in your contract. (Remember, the deposit covers the risk a card company takes when lending to you.) Manage the card responsibly and you’ll get the deposit back.
- You can rebuild credit. A secured card, unlike a prepaid card, reports your credit record to some or all of the major credit reporting companies, TransUnion, Experian and Equifax. This allows you to establish or rebuild your credit scores and restore your credit if the card is used responsibly
- Easier to qualify. Not everyone qualifies for a secured card, but chances are good that you will, as approval rates are typically high. The requirements for these cards are much more forgiving than they are for major credit cards.
The Cons of Secured Credit Cards
- Small credit limit. Usually your limit is about the same as your deposit. The point is to build your credit slowly and safely, so have patience with starting small. Credit scores take into account how you use your available credit.
- Cost. Some of these cards really pile on the fees. Fees vary a lot, depending on the card you choose. So shop carefully for the very best deal.
- No rewards (mostly). If you’ve got good credit and manage your bills responsibly, it’s important to note that opting for a secured credit card will generally negate your ability to earn credit card rewards, with one or two exceptions. The Discover it Secured Card (see full review here), for instance, does offer 1% cash back on all purchases and 2% cash back on up to $1,000 in combined purchases at restaurants or gas stations. That card carries no annual fee and a variable purchase APR of 23.24%; you’ll want to see the full card agreement for details.
How Will Secured Cards Affect Your Credit Score?
When you’re shopping for a card, be sure to choose one that sends your payment activity and account information to all three of the major credit bureaus – Equifax, TransUnion and Experian. This allows your credit score to benefit most from your credit usage and on-time payments.
Think of the card not as a convenience so much as a way to build credit. To get the most from it, it’s important to know how credit scores treat your usage and payment activity.
One major credit score factor is your credit utilization rate, which compares how much credit you’re using with the credit limit on your card. To help build your credit, keep your utilization rate low. Do that by carrying a balance that’s no more than ideally 10% to at least 30% of your credit limit. Running up your card balance hurts your ratio, damaging your credit score. For example, if your credit limit is $300, keep your balance under $75. If your limit’s $200, keep the balance under $50. If it’s $500, don’t go over $125. Note, though: You don’t have to run up debt to have good credit. It’s perfectly fine to pay your balance off in full each month.
Your payment history also affects up to 35% of your credit score. Late payments bring down your score, while on-time payments keep your credit score healthy.
When Can I Expect to Upgrade to a Non-Secured Credit Card?
Again, it will vary from issuer to issuer, but, assuming you’re making all your payments on time and keep your credit utilization low, you should still expect to wait at least six months to a year for a formal upgrade. Some issuers outline in their application how you can go about qualifying for a traditional card or, at least, a higher credit limit.
For instance, Capital One grants it Secured MasterCard (see full review here) account holders access to a higher credit line after they make their first five monthly payments on time with no additional deposit needed. (The Capital One Secured MasterCard carries no annual fee and a variable 24.99% APR; see full card agreement for details.) And the BankAmericard Secured Card allows cardholders to qualify for a security deposit refund after 12 months of use. (That card carries a $39 annual fee and a variable APR; again, see full card agreement for details.)
At publishing time, the Discover it Secured and Capital One Secured MasterCard credit cards are offered through Credit.com product pages, and Credit.com is compensated if our users apply for and ultimately sign up for any of these cards. However, this relationship does not result in any preferential editorial treatment. This content is not provided by the card issuer(s). Any opinions expressed are those of Credit.com alone, and have not been reviewed, approved or otherwise endorsed by the issuer(s).
Note: It’s important to remember that interest rates, fees and terms for credit cards, loans and other financial products frequently change. As a result, rates, fees and terms for credit cards, loans and other financial products cited in these articles may have changed since the date of publication. Please be sure to verify current rates, fees and terms with credit card issuers, banks or other financial institutions directly.