What Is a Secured Credit Card? How It Works

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. With a secured credit card, the amount that you put down in a deposit will become your credit limit for your credit card.

Secured credit cards are often issued to subprime borrowers, or those with poor or limited credit histories (so-called thin-file borrowers). Because the card issuer will report on secured credit cards to credit reporting agencies, these cards can help borrowers improve their credit score.

key takeaways

  • A secured credit card is a credit card that is backed by a cash deposit, which serves as collateral should the cardholder 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.

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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 that you owe to 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 why credit card interest rates are so high: Unsecured debt is always more costly than secured debt, such as mortgages or car loans, to compensate for the lack of collateral).

How to Apply for a Secured Credit Card

You can apply for a secured credit card in the same way that you would apply for a regular credit card. 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 that 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.

Secured credit cards may come with an annual fee—like on a regular card. They may also impose a few other charges, like initial setup 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.

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.

How Do Secured Credit Card Deposits Work?

With a secured credit card, the amount of cash that you put down as a deposit becomes your credit limit—the amount you can charge on the card. 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 it stays in reserve.

You can lose your deposit, but 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. Alternatively, some secured credit card providers will review a borrower’s payment history on a regular basis, and will convert a secured credit card into a regular credit card if they regularly meet payments. In this case, you will also receive your deposit back.

Is a Secured Credit Card Good?

Secured credit cards are an expensive way to access credit, but they can be very useful for people looking to rebuild their credit score.

There are other a number of costs involved with secured cards that make them an expensive way to borrow. Secured cards’ annual percentage rates (APRs) tend to be on the high side—often more than 20%—and are currently in line with the national average of 20.68% as of May 2023. But if you are a secured-card candidate, then 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 much more expensive than other forms of credit available to you.

On the other hand, secured credit cards can be great for borrowers looking to improve their credit score. 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 that they put up compensates the card company for the extra risk associated with extending credit to them.

How to Build Credit with a Secured Credit Card

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. Unlike a prepaid credit card, which functions more like a debit card, a secured credit card will send your account history to the credit bureaus to be included in your credit report. This means that using a secured card can gradually improve 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 can 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.

Be warned, however, that improving your credit score in this way can do more harm than good if you miss payments. 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 that using a secured credit card can improve a credit score

Example of a Secured Credit Card

The Discover it Secured Card is one of the most popular secured cards on the market, and is typical of secured cards when it comes to fees and interest rates.

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. The minimum security deposit required to open the account is $200, and the maximum credit limit can be up to $2,500, depending on your income and the ability to pay. 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 cash-back rewards and has no annual fee—just like unsecured Discover cards. It carries a variable APR of 27.74% as of May 2023.

Do secured credit cards build credit?

They can. Secured credit cards are aimed at people with limited or poor credit history and can be a good way to improve your credit score. By making regular, reliable payments on a secured credit card, you can improve your credit score and access less expensive forms of credit.

How does a secured credit card differ from an unsecured credit card?

With a standard, unsecured credit card, no deposit is required. With a secured credit card, the money that you borrow from your card issuer is a covered by a deposit.

This deposit acts as collateral on the account, providing the card issuer with security in case the cardholder can’t make payments. This reduces the risk to the card issuer, which in turn means that secured cards are available to borrowers with a poor or limited credit history.

How do I close a secured credit card?

You can generally close a secured credit card at any time, as long as you are up to date with your payments and there is no balance outstanding on the card. To do this, contact your card issuer.

When you close a secured credit card, you should get your deposit back, less any fees that your card issuer imposes. Alternatively, your card issuer may offer to convert your secured credit card to a standard card if you regularly meet your payments.

How can I change a secured credit card to an unsecured card?

If you regularly meet your payments on your secured credit card, your credit score should gradually improve. You can check your credit score online at regular intervals so you know when you have a good chance of being approved for a regular credit card. Sometimes, your card issuer will do this for you and automatically convert your secured card to an unsecured card (and typically increase your credit limit as well).

The amount of time this takes to happen varies greatly, but if your credit score is poor, then you should expect to make regular payments for a few months before you are approved for an unsecured credit card.

The Bottom Line

Secured credit cards are a type of credit card that are backed by a cash deposit. This reduces the risk of lending to borrowers with poor or limited credit histories, and these borrowers can use secured credit cards to improve their credit score. Secured credit cards generally come with high levels of fees and interest, but they can allow borrowers to improve their credit history and access lower-cost forms of credit.

Article Sources
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