Secured credit card

What is a secured credit card?

A secured credit card is a card backed by a savings account. The money in the account acts as collateral for the credit card, and the amount helps determine the spending limit for the card. Borrowers cannot access the money in the savings account while they’re using the card.

Deeper definition

Usually, a secured credit card has a limit equal to 50 percent to 100 percent of the amount of the deposit. That means if the savings account securing the credit card has $1,000 in it, the credit limit be somewhere between $500 and $1,000.

Once you establish a positive payment history, the issuing bank may extend the card’s limit beyond your deposit. You use a secured credit card just like you do a regular, unsecured credit card. A secured credit card can be used at businesses that accept major credit cards.

If you have good credit, you should not apply for a secured credit card because you’ll find better options elsewhere.

But consumers with poor or no credit are good candidates for secured cards. The collateral allows the cards to have lower credit requirements than unsecured credit cards.

Though secured credit cards are helpful tools for borrowers seeking to build or rebuild credit, consumers need to do their research and read the small print before they apply.

Secured credit cards can come with fees and high interest rates. Nearly all have annual fees, and some have monthly maintenance fees. A new cardholder may be required to take out a costly insurance policy before using the card.

The interest costs make a secured credit card a bad option for someone who plans to carry a balance. Pay off the balance each month to minimize your interest expenses.

Example of a secured credit card

If you’ve banged up your credit, a secured card can help heal it.

Ideally, you should pay off the card each month, but if you have to carry a balance, limit it to no more than 20 percent of your card’s limit. That means if your card has a limit of $500, keep the balance under $100 to ensure the card helps your credit score as much as possible.

Before you apply for a secured credit card, ask the issuing company if it will report your payment history to the three major credit bureaus. If the answer is “no,” keep shopping around. A secured credit card won’t help your credit unless the issuer reports your information.

Always pay the credit card by the due date. Not only does this help establish a good payment history, it also minimizes fees and interest associated with late payments.

Over time, your credit will improve with responsible usage of the secured credit card, to the point that you can apply for an unsecured card.

Most major banks offer secured credit cards. If you’re having trouble getting approved for a card or finding one with favorable terms, check your local credit union. Most credit unions offer their members secured credit cards with reasonable fees and interest rates.