Secured credit cards

How secured credit cards work

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.

1. 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.
2. 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.
3. 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.

What should I look for in a secured credit card?

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.

How to effectively use a secured card

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.

How to fund a secured credit card

Once you’re approved for a secured card, you need to fund your security deposit before using your card. Most secured cards expect you to choose your deposit, though some do have minimums and maximums. Funding your deposit can be done in a handful of ways:

Fund your card by mail

Lenders will typically allow you to fund your new card by sending a check or money order by mail. Generally, you’ll complete a security funds to be mailed with the deposit check. Find the address and any other necessary information on the credit card website or by following the instructions in the package you received from the issuer.

Fund your card by phone

Most new credit cards have a sticker on the front or back of the card with a number to call to activate the card. If the issuer uses an automated system, follow the prompts to fund your deposit and activate the card. If you’d like to speak to a representative, they can walk you through the process.

Fund your card online

Many secured credit cards offer an online system to manage your account, often with the option to pay your deposit. Once you’ve receive your card, follow the instructions to set up your online account. Once your account is set up, navigate to the section dedicated to deposits, then fill out and submit all required information.

Who are secured credit cards good for?

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.

Five ways secured credit cards rebuild your credit

1. 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.
2. 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.
3. 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.
4. 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.
5. 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.

How to apply for a credit card after bankruptcy

Before applying, know that your options may be limited. But it’s possible to get a credit card post-bankruptcy, especially if you work on improving your credit over time. Follow these steps to get your first credit card after bankruptcy.

1. Take stock of where you’re at. If you want to open a credit card post-bankruptcy, one of your main goals is to restore your credit to a reasonable standing.
2. Prepare to apply for credit cards after bankruptcy. When you apply for a card, the provider initiates a hard inquiry on your credit report. This will typically drop your credit score by a few points. That’s why it’s important to find the right card and apply one at a time.
3. Compare credit cards. Explore your options by comparing credit requirements, annual fees, APRs, reward opportunities and reporting to the major credit bureaus.
4. Rebuild your credit. Now that you have a fresh start, it’s a great time to build the right financial habits. These include keeping your card’s balance below 30% and paying your bill on time and in full each month.

Do secured cards come with rewards?

You may have heard of reward credit cards — cards that offer bonuses for spending.

For example, a cashback card returns a portion of your spending back to you. If your card offers 2% cash back on all purchases, spending $10,000 means you get $200 back.

Meanwhile, a travel card offers points or miles based on your spending. Maybe your card offers 2 points per dollar you spend at restaurants: If you spend $5,000 on dining, you’ll earn 10,000 points. Redeem these points for hotels, flights, car rentals, cruises and more.

Rewards for unsecured and secured cards: It’s lopsided

Here’s the thing about rewards: You’ll almost always find them with unsecured cards.

Secured cards with rewards do exist, but they’re rare. Lenders largely offer rewards to attract consumers with good credit. In the secured-card space, they offer few bonuses.

If a card comes with rewards, check if your points or miles might be diminished by an annual fee. To decide if the annual fee is worth paying, calculate how many points or miles you need to earn to break even. Then find how much you must spend to obtain them.

Are there low-income secured credit cards?

The Consumer Financial Protection Bureau recently amended the Credit CARD Act to make it easier for stay-at-home spouses and partners to get credit cards. Card issuers can now consider third-party income if the applicant has access to that money — for instance, a stay-at-home spouse who has access to their spouse’s income. If this applies to you, you may list your spouse’s income on your application when applying for a credit card.

Even with low income, you can still get your hands on a few terrific credit cards, such as the Discover it® Cash Back. Just know that your income can affect your total credit limit.

What if I’m turned down because of my income?

There are still options available to those with low income if you’re turned down for a secured credit card.

• Become an authorized user. If your income is keeping you from the credit card you want, consider tagging along on a loved one’s application as an authorized user. While the card account won’t be in your name, you’ll reap the benefits of the card as and good credit habits will reflect on your credit score.
• Find a co-signer. Similar to becoming an authorized user, you can also find a co-signer to vouch for you and apply alongside you. In this case, you’ll both take responsibility for the card account.

Secured credit cards vs. unsecured credit cards

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 vs. prepaid cards

Secured credit cards and prepaid cards may look similar, but they have notable differences. Here’s a quick rundown of a few of the main features that separate the two:

When are secured cards better than prepaid debit cards?

Secured credit cards allow you to use the lender’s money on credit with the promise to pay it back later. The greatest advantage secured cards have over prepaid cards is that it helps you build your credit score as you use it.

Secured credit cards also offer more flexibility in your spending, and some offer rewards programs, benefits and other perks that aren’t available on prepaid debit cards.

Which banks offer secured credit cards?

Ask the experts

• Andrei Simonov
• Chairperson of the Department of Finance
• Michigan State University

How effective are secured cards at helping consumers build their credit?

They are quite effective. In most cases, for clients with limited or no credit history at all, it is a great option to build their FICO score. In particular, secured credit cards are popular among recent immigrants. The advantage of a secured credit card is exactly the fact that it helps you to create a positive credit history. The disadvantage is cost. Those cards tend to be expensive, and many carry annual fees and high-interest rates.

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• Travis Davidson
• Associate Professor of Finance
• Ohio University

What should a consumer do for their credit if they get denied a secured card?

If the goal of initially applying for a secured credit is to obtain credit (i.e. borrow money), then a consumer should apply for credit elsewhere (other credit cards, store cards, banks, etc.). However, if the consumer’s goal is to improve their credit, then I believe a mental shift is necessary. A person denied a secured card likely has a bad credit history, which is often caused by making late payments or missing payments completely. Dedicating oneself to paying bills on time – always and forever – might be the best way to improve credit enough to obtain a loan in the future.

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• Daniel Folkinshteyn
• Associate Professor
• Rowan University

When is a secured credit card a good idea?
A secured credit card is a good option when one doesn’t have a good enough credit history to qualify for a regular credit card. You have to make an initial collateral deposit which serves as your credit line, and still have to pay it off every month to avoid getting charged interest and or late fees. Look at the card’s terms and conditions to ensure they don’t charge egregious fees. There are many competitive secured credit card offers so you should shop around to get the best deal. An alternative is to. use a debit card attached to your checking account, though that would not help you build your credit score.

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• Neel Das
• Associate Professor
• Appalachian State University

Can secured credit cards really help consumers raise their credit?
One could assume that a likely correlation exists between secured credit card usage and improved creditworthiness. But to assert such with conviction would be tenuous because other factors also play a role.

One main consideration for people new to credit or attempting to repair bad credit is using secured credit cards. While solely relying on such a card may not be the optimum tactic, this could be a move in the right direction to help consumers improve or raise their credit.

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• Al Kamienski
• PhD Professor of Finance
• North Park University

Can spending more money help consumers build their credit score faster?
If a borrower hopes to increase their credit score quickly it is generally not advisable to quickly spend more money using a credit card. Financial institutions monitor ratios including total balance outstanding divided by the total credit available. If this percent indebtedness grows too quickly a financial institution may flag the account and accelerate risk management. Lenders don’t like uncertainty and are more comfortable with predictable behavior. One best practice for increasing a credit score quickly is to become more predictable by spending around 25% of a credit limit monthly and then paying off the balance in full at the end of every billing cycle. This demonstrates a history of on-time payments, credit avoids interest costs, and provides historical behaviors can increase a credit score and give confidence to future lenders.

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• Julio Sevilla
• Assistant Professor in the Terry College of Business
• University of Georgia

How do secured credit cards help consumers build their credit score?
The key is access to credit. People with new or damaged credit scores struggle to get approved for some favorable credit products, which prevents them from building or rehabilitating their credit score. The main reason why they’re denied is the high risk of default creditors can sense. By securing their credit cards, this risk disappears or diminishes and the consumer now has an opportunity to have credit and build it through time with a positive and consistent track record. I would recommend consumers that have limited access to credit to cautiously consider these options.

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Tips to save money on your secured credit card deposit

Your plan to get a secured credit card must involve a saving strategy that begins with knowing your fixed expenses. Developing new spending habits can yield a lot of savings, but a little assertiveness won’t hurt either.

1. Download a free budgeting app. Set financial goals, track your spending, view your credit score, keep tabs on your investments and balances, pay bills and receive alerts.
2. Download a free mobile banking app. Some mobile banking app work by moving money from your checking account to a separate account when your transactions trigger preset rules.
3. Look into low-income assistance. Many communities offer low-income assistance programs for gas, electricity and other utilities. Also, if you initially put down a deposit for your utility accounts, ask if you can have it refunded after about a year of timely payments.
4. Get programmable thermostats and energy-saving appliances. Install a programmable thermostat to lower home heating costs or seek out Energy Star–labeled appliances. Many utilities offer rebates that partly cover the installation cost.
5. Reexamine your phone bill. Examine your phone’s service plan, and talk to your provider about ways to bring down your cost. Consider a stepped-down plan or use a prepaid carrier or join a friend or family member’s plan can also reduce your monthly smartphone tab.
6. Ditch cable. Join the growing number of cord-cutters by exploring whether streaming services can replace your cable bill. If you aren’t ready to ditch cable, call your provider to negotiate a cheaper deal.
7. Look into your transportation options. If you live far from work, consider asking your employer if telecommuting is possible to save on gas costs. Evaluate public transportation, particularly if you live in or near an urban center where trains, buses, carpooling and carshare services, are available. If you do drive, apps like GasBuddy and Gas Guru can steer you to the best gas deals along your route.

What if my application for a secured credit card was denied?

The first course of action to take once you’ve been denied for a secured credit card is to identify the reason why you’ve been denied. Do this by contacting the lender directly and asking for answers. There may be inaccurate information on your credit report — if this is the case, contact the credit bureaus to dispute the misinformation.

You could also consider applying for a secured credit card at a credit union or with a lender that doesn’t conduct a credit check. Another option is to become an authorized usermore info button on someone else’s credit card account.

Why your secured credit card application might have been denied

You’re legally entitled to know exactly why your application was rejected. Within seven to 10 days of a rejected application, you should receive an adverse action letter from the issuer, which explains the reasoning behind your denial. This letter is the key to understanding exactly why you were denied, as you can use it to make changes that will increase your chances of approval.

While there are many reasons why your application could have been denied, here are a few of the most common causes:

• Poor credit score. Credit card issuers often require a minimum credit score to verify your ability to pay your bills.
• Outstanding loans. Outstanding loans may be a sign that you are unable to pay off debts, which can be a red flag to some issuers.
• A history of inadequate income, missed payments or bankruptcy. Issuers want to make sure you’re able to pay your bill. If you have inadequate income or you have a bankruptcy on your history, they may doubt that ability.
• Spotty employment history. Just like inadequate income, a spotty employment history may be seen as a sign that you’re unable to pay your bill.
• Error on your application. This could be as minor as a spelling error or a wrong phone number. Always check to make sure all of your information is correct before submitting your application.
• Error on your credit report. Your application may also be rejected due to errors on your credit report, which can be resolved by contacting the relevant credit bureau.
• Security deposit. Sometimes, the reason for a denied application may prove as simple as failure to pay the security deposit.
• Too many applications or inquiries. Too many credit card applications or inquiries in a short period can decrease your credit score or indicate that you are relying too heavily on credit.
• Credit card is not eligible in your state. Every state has different laws and regulations surrounding credit cards, meaning that not all cards are available in every state.

Things you can do if your application was denied

If your secured card application is denied, you have several options available:

• Apply with a different bank. There are plenty of secured card options available. If you weren’t able to qualify for your first choice, give it a month and then try applying for your second choice – ideally with a different issuer. You can also look for secured cards that don’t check your credit.
• Improve your credit score. Focus on paying down any existing credit balances before trying again. That means making your payments on time, keeping your utilization ratio at 30% or less and paying off any balances you can. Even a few small improvements to your score can help you qualify for a secured card.
• Become an authorized user. If you have a loved one with good credit, ask if they’ll let you become an authorized user on one of their cards. The primary cardholder will remain responsible for payments, but your credit score will enjoy the benefits of on-time payments.
• Look into credit-builder loans. A credit-builder loan serves the same purpose as a secured card and is a great alternative if you can’t find a secured card you want. The major difference is you won’t be able to access your “loan” until you pay off the balance in full.
• Personal loans. A personal loan can also help you build your credit as you pay it back. However, this option isn’t ideal compared to a secured card. Consider this only if you also need cash for an important purchase.

When can I ask for an upgrade to 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.

Bottom line

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.

Written by

Steven Dashiell

Senior writer

Steven Dashiell is an editor for Bankrate and CreditCards.com and formally a personal finance writer at Finder, specializing in credit cards, banking and growing and protecting your income. His insights and expertise has been featured on Nasdaq, U.S. News & World Report, Time, CBS, ABC, Fox Business, Lifehacker and Martha Stewart Living, among other top media. Steve holds a BA in English from University of Maryland, Baltimore County, minoring in composition and rhetoric. In his spare time Steve nerds out on birds, paints and plays a whole lot of Street Fighter. See full bio

Steven's expertise

Steven has written 61 Finder guides across topics including:

• Credit cards
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