These cards are linked to a deposit account balance, which determines your credit limit, allowing you to avoid excessive debt while also building a credit history.
A secured credit card is designed to help you build your credit score and works similarly to a traditional credit card. The main difference is you need to put down a security deposit before you can open a secured card.
The deposit helps protect the issuer in the event you default or fall behind on your payments. It allows the bank to extend credit to you when you otherwise wouldn’t qualify for a credit card. This gives you the opportunity to build your credit by showing you can responsibly manage a credit card.
These are the three basic steps for how secured credit cards work.
- Compare and apply for a card. Browse all secured credit cards and choose the one that seems most appealing. You may have to provide your bank credentials during the application to pay the deposit.
- Raise your credit score. Now that you have a card, use it to raise your credit score by paying your full balance on time each month.
- Graduate to an unsecured card. Once you raise your credit score, you’re ready for a new card. Contact the bank to see if you can upgrade your card and get your deposit refunded.
When researching what card will best fit your needs, there are a few main factors to take into consideration:
- How much do you have to deposit?
- What’s the annual fee?
- How high is the APR?
- Is there a grace period for interest payments?
- What are the fees?
- Is your payment history reported to the three major credit bureaus?
A provider’s website should clearly list a card’s deposit, annual fee and APR. When you’re confident you understand all of the card’s details, it’s time to submit an application.
Here’s how to use a secured card to effectively build your credit:
- Pay your balance on time. And pay it in full. This is the best way to build your credit and potentially graduate to an unsecured card.
- Avoid maxing out your credit limit. The chances are you’ll get the minimum credit line of around $300. Maxing out your credit limit could send the wrong signal to other lenders. The recommended utilization ratio for credit-building is less than 30%, but in this case, you can safely go to 50% as long as you always pay off your balance in full before the due date.
- Put your subscription services on the card. Get your Netflix account or any similar service and automate your payments so you always use your card and always pay off your balance.
A secured credit card can be a useful financial product for a handful of different people in a variety of situations, whether they need to build credit or learn how to use a credit card responsibly. Here are a few situations where you might benefit from a secured card:
- First-time credit card user. A secured card in this case can be useful for numerous reasons. Using it will help you build credit, learn smart spending habits and teach yourself how to responsibly manage an account with your own money.
- Bankrupt. The best way to combat being denied after declaring bankruptcy is to apply for a secured credit card with no credit check.
- Student. A secured card can be useful for a student in teaching responsible spending habits with a limited balance.
- Poor credit. It’s a great way to rebuild your credit is to use a secured credit card and make on-time payments and clear your balance each month. Learn more about how to determine your credit score.
- Building credit. If you have minimal credit history, a secured credit card can put you in a good position to start pushing your credit score up the hill.
- Identity theft. While this may not be your fault, traditional lenders may be unwilling to lend to you. In this case, apply for a secured credit card with no credit check and frequently monitor your account.
- Secured cards are a quick first step. These cards typically don’t require credit checks, and you won’t be subject to a soft or hard inquiry. You’ll likely be green-lighted for a card unless you’ve recently claimed bankruptcy or you have a history of frequently missing payments.
- Most secured cards report to credit bureaus. When bureaus see you’re responsibly using your credit card, they’ll reward you with higher credit scores. Be sure to confirm with your lender that your spending and payment history will be reported, otherwise the card will do nothing for your credit history.
- They lower your credit utilization ratio. After you’re approved for a secured credit card, your credit utilization ratio should go down. Credit utilization is so important that it makes up 30% of your credit score. Credit bureaus want to see you have a lot of available credit relative to your card balances.
- They increase your total number of credit accounts. Just like your utilization ratio affects your credit score, so does your total number of open credit accounts. Credit bureaus generally like seeing more accounts because it indicates that more lenders find you creditworthy.
- Secured cards help you build better financial habits. When you open a secured card, you put down a security deposit that’s equal to your credit limit. That means you can control the amount you deposit, thus setting your credit limit on your own terms. After you build your financial habits, you’ll be ready to obtain unsecured cards with higher credit limits.
Secured cards pros and cons
Because secured cards are designed for building credit, there are some trade-offs to consider.
Pros
- Low credit score requirements. Apply with a poor credit score of 300 or no credit history and still get approved for the card.
- Good for building credit. Use your card responsibly, pay your balance when it’s due and on time, and it will build your credit. Once you’re back on track, you can easily apply for a better card.
- Rewards. Earn cash back on your purchases with some secured cards. However, the rewards rate is lower compared to their unsecured counterparts.
- Control over your credit limit. Make a secured deposit that acts as your credit line. That way you can control the size of your credit line. Unfortunately, all card providers impose limits on the amount you can deposit.
- Upgrade to an unsecured card. You do more than simply build your credit with a secured card. You’ll likely also get an upgrade to an unsecured card if your provider finds your card activity worth rewarding.
Cons
- Upfront costs. Deposit a required sum to use the card. If you decide to close your account, the card issuer often returns this deposit.
- Annual fee. Pay an annual fee of up to $49 for the card. Luckily, not all secured cards come with an annual fee.
- Foreign transaction fee. Pay foreign transaction fees of up to 3% for each transaction made abroad or online with foreign merchants. That’s because secured cards aren’t designed for international travel.
- No intro APR period. It’s hard to find a secured card that offers a 0% intro APR period on purchases, balance transfers or both. Those cards that do offer this perk will likely have 6% or 9% intro APR period instead of 0%.
- No signup bonus. Often, you won’t get to earn a signup bonus of any kind. However, there are some cards that offer this perk, the Discover it® Secured card being one of the more generous options.
The primary difference between a secured card and an unsecured card is that a secured credit card requires a security deposit. This security deposit can range from $50 to more than $200 and acts as collateral for the issuer (and sometimes acts as your maximum credit limit).
It’s a type of guarantee that if you go belly-up on your payments and your account is closed, the issuer is covered for losses. And don’t worry: Assuming you used your secured card responsibly, you’ll get your deposit back after you close your account.
Otherwise, secured credit cards are nearly identical to unsecured credit cards in how they function, including how they affect your credit score. Remember that a secured card will typically have a lower credit limit and higher APR than an unsecured card.
Secured credit cards can be used just like any other credit cards, often with the goal of graduating to an unsecured card.
If your provider doesn’t contact you with the opportunity to upgrade, call them after about a year of responsible payments to ask about trading up to an unsecured card. At that time, you can also ask about a refund on your deposit.
Plan to use your card for small purchases that you can pay off each month. Remember that payment history is 35% of your credit score, making it the largest single item factored into your credit score.
Secured cards are a useful tool for building or rebuilding your credit score and moving on to an unsecured card. Your main goal is to spend responsibly, pay your balance on time and graduate to more beneficial credit cards as soon as possible.
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