What Is a Secured Credit Card? Everything You Need to Know

When trying to build or rebuild your credit, a secured credit card can serve as a useful tool. Unlike a regular credit card, secured credit cards come with a deposit, which credit card companies use as collateral against your purchases. But with responsible management, they offer a way to build a positive credit history. 

Before you jump into opening a secured credit card, it’s helpful to understand how these financial products work. Explore the details of secured credit cards in this guide. 

How a Secured Credit Card Works

A secured credit card is a type of credit card. Unlike an unsecured credit card, opening a secured credit card involves a minimum cash deposit, typically in the range of $50 to $500. 

The cash deposit serves as collateral for the purchases you make using the credit card. At first, the issuer usually sets your credit limit equal to the size of your deposit. So, if you make a deposit of $300, then your secured credit card might have a $300 spending limit. 

You can use it like a regular credit card once you have it in hand. When you make purchases using the card, the costs are added to your statement balance. Each month, you’ll have an opportunity to repay the borrowed funds without interest charges. If you carry a balance, you’ll incur interest charges, just like with other credit cards.

As you make payments (or don’t) your activity is reported to the credit bureaus. If you stick with making payments on time, responsible use of a secured credit card can help you build a positive credit history over time. 

Issuers tend to treat secured credit cards like regular credit cards with training wheels. After all, if you don’t keep up with the payments, the issuer can seize your cash deposit to pay off your balance. This safety net lowers the risk for issuers. 

After using your secured credit card responsibly for a period of time, many issuers offer upgrades to an unsecured credit card. That means you won’t need to keep a deposit on file with the issuer. Once upgraded to an unsecured credit card, you will likely get your deposit back in cash or in the form of a statement credit on future purchases. 

If you decide to close your secured card at some point, you’ll often get your deposit back. However, if you have an unpaid balance on the card, then expect the issuer to keep it. 

Who Should Consider a Secured Credit Card?

A secured credit card won’t suit everyone’s needs. But a secured credit card may work well for people in the following situations:

• You don’t have a credit history. If your credit history is a blank slate, opening a secured credit card can get the ball rolling. These types of cards are popular with students. 

• You have a poor credit history. Past delinquencies or bankruptcies could drag your credit score down, making it difficult to get approved for future loans. Opening a secured credit card could help you rebuild a history of responsible credit usage. 
• You’ve been denied a traditional credit card. If you’ve been denied an unsecured credit card, it could be a sign that you need to beef up your credit history with the help of a secured card. 

Ultimately, a secured credit card offers a simple and relatively low-risk way to establish or rebuild credit responsibly. 

In contrast, those with a good or excellent credit score might decide to skip a secured credit card altogether. Higher credit scores may open the door to unsecured credit cards, which typically offer more user perks. 

How to Use a Secured Card to Build or Rebuild Credit

In order to get the most value out of a secured credit card, it’s helpful to use it responsibly. Responsible use generally includes:

Always making on-time payments

Payment history accounts for a significant portion of your credit score. A string of on-time payments can improve your credit score over time. Do your best to always make at least the minimum payment on time. 

Keep your credit utilization ratio below 30%

Credit utilization measures your credit use against your credit limit. For example, let’s say your credit card has a $1,000 credit limit. If you have a $500 balance, then your utilization rate is 50%. 

A low credit utilization ratio shows lenders that you aren’t maxing out your credit cards or overspending against your limit. Generally, it’s a good idea to keep your credit utilization ratio below 30%. 

Sticking to the low credit utilization ratio might be a challenge because of the low limits associated with secured credit cards. For example, if your credit limit is $200, staying below a utilization rate of 30% means not incurring a balance higher than $60. Although a possible challenge, maintaining a relatively lower credit utilization ratio can be worthwhile. 

Avoid carrying a balance

When you only make minimum payments to your credit card, you might end up carrying a balance. Credit card companies expect you to repay the balance with interest, which can add up quickly. 

Generally, credit cards come with relatively high interest rates, making it expensive to carry a balance. If possible, avoid carrying a balance by only using the card to buy what you can pay back by the time the due date comes around. 

Consider choosing a card with a pathway to unsecured status

Many unsecured credit cards offer a defined path to earning unsecured status. For example, you might need to make on-time payments for several months before your secured card becomes an unsecured credit card. 

If you prefer to have an unsecured credit card in your wallet, consider opting to open a secured credit card that offers the possibility of graduating to an unsecured card at some point.

Monitor your progress

As you use your new secured credit card responsibly, monitoring your credit score on a regular basis can help you track any changes. The forward progress might help you stay committed to using your secured card responsibly. 

Secured vs. Unsecured Credit Cards: Key Differences

Secured credit cards and unsecured credit cards come with several major differences. For starters, an unsecured card doesn’t require the security deposit often needed from a secured credit card. 

The table below highlights several other differences to know:

Some secured credit cards are better than others. As you wade through your options, look for one that hits the following metrics:

• Low or no annual fee. Many credit cards come with an annual fee attached. But it’s usually possible to find a secured card with either no annual fee or a low annual fee. 
• Limited other fees. Beyond annual fees, credit card issuers might charge other types of fees, like late fees or foreign transaction fees. Seek out a card with minimal fees. 
• Reporting to all three credit bureaus. If you are looking to build credit through your secured card, you’ll want the issuer to report your payment information to all major credit bureaus. These include Equifax, TransUnion and Experian. 
• Straightforward path to an unsecured card. Although some secured cards offer a clear path to an unsecured card, others don’t. If an unsecured card is something you want in the future, consider choosing a secured card with a plan to get there. 
• Some perks. Secured credit cards generally offer fewer benefits than unsecured credit cards. But finding a secured credit card with built-in rewards or cash back offers could help sweeten the pot. 
  

Pros and Cons of Secured Credit Cards

Like all financial products, secured credit cards have both advantages and disadvantages to consider. These include:

Pros:

• Easier approval for people with bad or no credit. Typically, it’s easier to get approved for a secured credit card than an unsecured credit card. If you are starting with no credit or bad credit, a secured credit card may offer the foothold you need. 
• Builds credit with responsible use. If you use a secured credit card responsibly, you may see your credit score improve over time. Responsible use generally includes making on-time payments and maintaining a relatively low credit utilization rate. 
• Can transition to an unsecured card over time. As you use the card, you have an opportunity to prove your creditworthiness to the lender. At some point, they might offer a transition into an unsecured card, which generally comes with more perks. 

• Teaches healthy financial habits. Although you’ll have the guardrails of a security deposit, getting used to paying with plastic can help you avoid overspending. 
• Refundable deposit. You’ll usually recoup your deposit when you close the account or upgrade to an unsecured card.

Cons:

• Requires upfront deposit. The crux of a secured credit card is your deposit. Depending on the card, you may have to make a deposit equal to several hundred dollars in order to get started. 
• May have lower limits. Because a secured credit card ties your credit limit to your security deposit, you’ll often find a relatively low limit. Some issuers allow you to increase your credit limit by increasing your deposit. But making a larger deposit comes with its own challenges. 
• Some carry annual fees. Many secured cards come with annual fees, which can take a bite out of your budget. 

• Doesn’t guarantee approval for future unsecured credit. Many secured cards offer a path to an unsecured credit card in the future. But depending on the situation, the upgrade may never come. 
• May hurt your credit score with irresponsible use. Although using a secured card may improve your credit score, it’s not a guarantee. With irresponsible credit usage, you might actually hurt your credit score. 

Is a Secured Credit Card Right for You?

For many, a secured credit card is a helpful tool. Whether you are starting from scratch or trying to rebuild your credit, opening a secured credit card could be a smart first step. If you commit to on-time payments and other responsible credit management choices, you might see your credit score rise over time. 

Before jumping into a secured card, be sure to compare all of your options. After picking a card that best suits your needs, use it wisely. 

Sarah Sharkey is a personal finance writer who enjoys helping people make informed financial decisions. Her work has been on many finance sites, including USA TODAY, Credible and Business Insider.