What Is a Secured Credit Card?
A secured credit card is a type of credit card that is backed by a cash deposit from the cardholder. This deposit acts as collateral on the account, providing the card issuer with security in case the cardholder can't make payments. Secured credit cards are often issued to subprime borrowers or those with limited credit histories (so-called thin-file borrowers).
With standard reporting to credit reporting agencies, these cards can help borrowers improve their credit profile.
- A secured credit card is a type of credit card that is backed by a cash deposit, which serves as collateral should you default on payments.
- The deposit aside, secured credit cards function like any credit card.
- Consumers typically obtain secured credit cards to improve their credit scores or establish a credit history.
- Secured credit cards typically have lower credit limits and more fees than unsecured credit cards do.
How a Secured Credit Card Works
Most credit cards are unsecured: There is nothing guaranteeing or "securing" your ability to pay off your accrued balance, which is basically money you owe the credit card company. Its contract with you has you agreeing to pay your balance in whole or in part each month, but you're not putting up any of your assets or income to back that promise. (That's one reason credit card interest rates are so high—unsecured debt always is more costly than secured debt, such as mortgages or a car loans, to compensate for the lack of collateral).
With secured credit cards, you do put up something as part of your agreement with the card company. When you apply for secured credit cards, the card issuer assesses your credit score and credit history through a hard inquiry with a credit reporting agency. It then determines the amount of deposit needed to open an account and the credit line that will be extended. Basically, the amount you deposit becomes your credit limit—the amount you can charge on the card.
Deposits start at $200, and typically are three figures, but some cards let you go as high as $2,000 or even more.
Secured Credit Card Structure and Terms
Aside from the deposit, secured credit cards function in the same way as regular (unsecured) credit cards. They are issued by nearly all of the leading credit card lenders, like Visa, MasterCard, and Discover, and look just the same. Cardholders can use the card anywhere the card brand is accepted, and may be eligible for perks and rewards. Cardholders also receive monthly statements showing their end-of-period balances and the activity on the card during the specified month. They're responsible for paying at least the minimum due, and they pay interest on outstanding balances, which is detailed in the credit agreement. They may also pay an annual fee—again, like on a regular card—and a few unique ones, like initial setup fees or activation fees, credit increase fees, monthly maintenance fees, and balance inquiry fees.
All these can and do cut into the deposit and the amount of available credit, so they bear examining before signing up. So does the annual percentage rate (APR). Secured cards' APRs tend to be on the high side—often north of 20%, but are currently in line with the national average of 21% as of December 2019. On the other hand, if you are a secured-card candidate, your credit score is presumably not the strongest, and you wouldn't qualify for the best rates anyway. So 20% or more may not be that out of line.
Since the deposit made to open the secured credit card account serves as collateral, it is not accessible to the borrower once it has been paid, but stays in reserve. Usually secured card issuers will use it only if you default or miss a certain number of payments. If you cancel the card, you receive your deposit back, assuming your balance is paid off.
Who Uses Secured Credit Cards?
Secured credit cards are aimed at people with a poor credit history or very little credit history—those who would have trouble qualifying for a regular credit card. The deposit they put up compensates the card company for the extra risk it's assuming in extending credit to them. Obtaining a secured credit card, and then using it responsibly for several months or a couple of years can be a recommended way to establish or improve your credit history and/or boost your credit score. In fact, if you maintain a positive payment history, secured card lenders may increase your credit limit over time, or even offer to upgrade you to an unsecured card (in which case, you would get your deposit back).
Maintaining that positive history usually means paying off balances in full each month, and of course, paying on time. If you miss payments, lenders will report delinquencies to the credit reporting agencies, which won't do your credit score any good.
While consumers typically obtain secured credit cards to improve their credit, their credit score can be damaged if any delinquencies arise.
The minimum number of months using a secured credit card can improve a credit score
Example of a Secured Secured Credit Card
The Discover it Secured Card is one of the most popular secured cards on the market. Discover generally accepts borrowers in the "fair" credit category—that is, those with a credit score in the 580-670 range—along with borrowers who have a minimal credit history. It accepts deposits of $200 or $500. After eight months, the account is reviewed to see if it qualifies for transfer to an unsecured card, at which time the borrower’s deposit can be refunded.
The Discover it Secured Card offers numerous cashback rewards and has no annual fee—just like unsecured Discover cards. It carries a variable APR of 24.99%, as of September 2019.