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What is a secured credit card and how does it work?

Man using credit card and mobile phone to make payment
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Man using credit card and mobile phone to make payment
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When your credit score is in the lowest range — 579 or below — finding a credit card issuer who will approve you for one of its products can seem like an impossible feat. Fortunately, card issuers offer one type of credit card that almost anyone can be approved for.

With a secured credit card, consumers with poor credit get the chance to build credit, practice good credit card habits and prove their creditworthiness over time. This form of credit requires a cash deposit to secure a line of credit. However, despite having to pay a deposit, secured credit cards function like any traditional credit cards.

What is a secured credit card?

A secured credit card is a type of credit card that is backed by a cash deposit. The deposit is often equal to the credit limit, which tends to be equal to 50 percent to 100 percent of the amount of the initial deposit. If you apply for a secured credit card and put down a $1,000 deposit as collateral, for example, you’ll likely qualify for a $500 to $1,000 line of credit as a result.

Getting approved for an unsecured credit card can be very difficult when your credit score is poor, yet you may not be able to improve your credit over time if you can’t find a lender to give you a line of revolving credit. It seems counterintuitive when you can’t build credit without a credit card, but you can’t get approved for a credit card without having an established credit score. That is where secured credit cards come in.

How do secured credit cards work?

A secured credit card functions similarly to a debit card. However, you’re essentially relying on your cash deposit, which is what translates to your secured line of credit to make purchases.

To get a secured credit card, you can apply for one at a bank, credit union or credit card company. The financial institution you’re working with may check your credit history during the approval process.

The credit card provider should report information about your account to the three main credit bureaus — Experian, Equifax and TransUnion — which helps build your credit score. You’ll want to double-check with the issuing company before you apply to make sure it will report your payment history to the three main credit bureaus.

If approved, you’ll need to make a deposit that acts as collateral. This is often at least $200 and can be as high as $2,000 to $3,000. In some cases, your deposit amount will act as your credit limit, although your limit may also be less than the deposit amount. After making the initial deposit, you can use the card to make purchases in-person or online up to your credit limit amount. A secured credit card can be used in places where credit cards are accepted like gas stations or grocery stores.

Once you pay off your balance for any recent purchases, you can then use the card again to make more purchases. If you don’t pay off your balance in full each month, you will start to incur interest on the carried balance.

Secured vs. unsecured credit cards

Generally speaking, unsecured credit cards are more appealing to most consumers. When a card is unsecured, you don’t have to put down a deposit as collateral. Unsecured credit cards also tend to come with better perks and rewards, lower fees and lower interest rates. However, individuals with a good or excellent credit score have better chances to qualify for this type of credit card. Although, there are a few unsecured credit cards available for bad credit.

When you start out with a secured credit card and you prove your creditworthiness by making consistent, on-time payments, your credit card issuer may automatically upgrade you to an unsecured credit card. It should be noted that changing from secured to unsecured credit cards might take around 12 to 18 months. It all depends on how well you manage your payments and build your credit score. When it comes to building your credit score, you’ll use the same process with a secured credit card as you would with an unsecured credit card.

The following chart explains some of the biggest differences between secured and unsecured credit cards:

Unsecured credit cards Secured credit cards
Minimum credit score to qualify Usually 670+ Available for scores below 579
Deposit required? No Yes
Average APR Around 17% (as of June 2022) Often over 20%
Annual fee charged? Sometimes Usually
Helps you build credit by reporting to credit bureaus Yes Usually
Rewards available? Yes, with many rewards credit cards Usually no

Secured credit cards vs. prepaid debit cards

It is important to not confuse a secured credit card with a prepaid debit card. One of the differences is that prepaid cards do not generate credit scores. If that’s what you are looking for, a prepaid debit card is not a great option.

With secured credit cards, you borrow and pay later. In contrast, prepaid debit cards require you to deposit before spending. Why do you need to deposit before spending with a prepaid debit card? The reason is that prepaid debit cards are not linked to your bank account.

Many can get confused since secured credit cards require a deposit. But the credit card company provides funding that you pay back each month in order to positively build your credit score.

The following chart explains some of the biggest differences between secured credit cards and prepaid debit cards:

Prepaid debit cards Secured credit cards
Minimum credit score to qualify N/A Available for scores below 579
Deposit required? Yes (before spending) Yes
Average APR N/A Often over 20%
Annual fee charged? Variable Usually
Helps you build credit by reporting to credit bureaus No Usually
Rewards available? Depends on the issuer Usually no

When should you get a secured credit card?

Consumers often use secured credit cards as a way to build their credit scores either because of a rocky financial past or simply because they have no credit history. Whichever situation you may relate to the most, let’s take a further look at when it may be the right time to consider a secured credit card:

To build your credit

Secured credit cards provide cardholders with a small line of credit in exchange for a refundable deposit that is put down as collateral. If you have poor credit or no credit at all, lenders see you as a liability because you have no credit history to prove what kind of borrower you are. However, by putting down a security deposit, the lender takes on some protection in the case that you default on your payments.

However, like any credit card, building credit is all about how you use the credit you have access to in the first place. If you can manage to keep your credit utilization low and make on-time payments every month, your credit score will improve in no time.

You want to graduate to an unsecured credit card

Secured credit cards make it easy to graduate to an unsecured credit card once you’ve successfully worked on your credit score.

So, once you’ve improved your credit score with your secured credit card, it may be time to graduate to an unsecured credit card. Your issuer may upgrade you to an unsecured credit card once you prove your creditworthiness with on-time payments, or you can ask your credit card issuer to transfer your secured line of credit to an unsecured credit card.

Alternatively, you could apply for a new unsecured credit card while holding on to the secured credit card account. Closing a credit card can actually hurt your credit score because you are reducing the total amount of credit you have access to in the first place. However, keep in mind when you close your secured credit card account, that is typically when you’ll get your full deposit back.

Tips for using a secured credit card

When it comes to using unsecured credit cards, the same rules apply to secured credit cards. Here are a few recommendations to keep your score in the best shape possible:

  • Always pay your balance on time. On-time payments are the single most important factor when it comes to calculating your credit score, accounting for 35 percent of your overall score. You want to aim to pay your statement balance in full every month to avoid interest and keep your credit in good standing. If you can’t make the full payment, don’t fret, but always make at least the minimum payment on time.
  • Confirm that the bank reports to the three main bureaus. If you are using a secured credit card in order to improve your credit score, you’ll want to ensure the credit card provider is reporting your credit usage to the three main credit bureaus. Some issuers may not report the status of secured cards, so make sure you are applying for a secured card that reports to at least one of the credit bureaus if better credit is your goal.
  • Keep your credit utilization rate below 30 percent. Credit utilization refers to the total amount of available credit you’re currently using in relation to the total amount of credit you have access to. Generally, it is best to keep your credit utilization below 30 percent. A high credit utilization means you’re close to maxing out your credit card and this can ultimately hurt your credit score.
  • Don’t overspend. The key to using a secured credit card is to use it for a few fixed purchases each month so it is harder to reach your credit limit. This will help you learn financial discipline while also building a strong credit score. When you are searching for a secured credit card, try to avoid committing to a deposit that will get you in financial trouble. Just because you have access to a $1,000 credit limit, doesn’t mean you should max out your card the minute you get it.

The bottom line

Secured credit cards may be the way to go if you’ve never had a credit card or want to improve your credit score. Building credit with a secured credit card is a great way to get your finances on track by establishing strong financial habits. This requires a bit of discipline as you learn the do’s and don’ts of credit, but when you put in the work, you will be on track to upgrading to an unsecured credit card in no time.

Written by
Holly D. Johnson
Author, Award-Winning Writer
Holly Johnson writes expert content on personal finance, credit cards, loyalty and insurance topics. In addition to writing for Bankrate and CreditCards.com, Johnson does ongoing work for clients that include CNN, Forbes Advisor, LendingTree, Time Magazine and more.
Edited by
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