What Is a Secured Credit Card?
A secured credit card is a type of credit card that is backed a cash deposit from the cardholder. This deposit acts as collateral on the account, in effect, acting as security it 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.
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. Your contract with them 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, like 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—which are —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.
- A secured credit card is a type of credit card that is backed 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.
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.
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 lenders 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. It generally approves borrowers in the fair credit category, with a credit score in the 580-670 range. It also accepts borrowers with minimal credit history. It accepts deposits of $200 or $500. At eight months, the card is reviewed for an unsecured card transfer, 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 has a variable annual percentage rate (APR) of 25.24%, as of July 2019.