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What Is a Secured Credit Card?

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When it comes to building or improving credit, everyone has to start somewhere. But when your credit history is poor or nonexistent, you’re often presented with a dilemma: You can’t get approved for the very credit cards you need to start improving your credit.

When you can’t get a traditional credit card, secured credit cards could be your solution. Here we explain who should consider using secured credit cards, how they work and how they can help you build or improve your credit.

Who Are Secured Credit Cards For?

Secured credit cards are intended for two types of people:

  •      People who wish to improve their poor credit
  •      People who wish to start building upon their limited or nonexistent credit

If you fit into one of the above categories, and as a result you’re having trouble qualifying for a traditional credit card, secured credit cards could be a viable solution. If you don’t fall into the above categories, you’re likely better off with a traditional, unsecured credit card. Keep in mind, though, that it’s still possible to be turned down for a secured credit card, particularly if you have a blemish like a bankruptcy in your credit history.

How Do Secured Credit Cards Work?

To open a secured credit card, you must provide a security deposit to the card issuer. The card limit is often equal to the amount you put down; for instance, a $500 security deposit would get you a $500 line of credit on your card. In some cases, credit card issuers extend a line of credit greater than your security deposit from the outset. In other cases, credit card issuers may increase your credit limit with no additional deposit after a period of responsible card use.

Why the security deposit? If you have limited or poor credit, the credit card issuer may consider you more risky than other customers. These deposits are intended to protect the credit card issuer in the event you stop making payments.

Other than the security deposit, secured credit cards function much like unsecured cards. They can be used for purchases anywhere that accepts your credit card, they require monthly payments and they charge interest if you don’t pay off your balance in full each month.

How Can a Secured Credit Card Help Me?

Because approval requirements are more lax than traditional credit cards, you have a better chance at getting a secured credit card (although it is still possible to be turned down, as we mentioned previously).

But just like an unsecured card, responsible use of your secured credit cards can help you build positive credit history and improve your credit score. It can also lead to an extended credit limit or the offer of an unsecured credit card from your card issuer. Lastly, those who have limited exposure or negative experiences with credit cards have the opportunity to build a positive history of responsible credit card use.

What Should I Consider When Choosing a Secured Credit Card?

The right secured credit card depends on your specific needs. You’ll want to know the state of your credit before applying and how much of a security deposit you’re willing (or able) to put down.

You might want to hunt for a card with a low (or nonexistent) annual fee and a competitive interest rate. Secured credit cards with a payment grace period can help you avoid interest charges by paying off your balance in full each month. It also helps to check with the card issuer to make sure they report to all three major credit reporting agencies.

Although it’s less common, some secured credit cards even come with cash back rewards, points or other benefits. Determining your goals and then carefully weighing both the costs and the benefits of a secured credit card can help you find the card that’s the right fit for you.

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