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A secured credit card is a credit card that is secured by a deposit. You put down a refundable security deposit and the deposit becomes your credit limit. The security deposit reduces the credit card company’s risk, so these cards are available to people with no credit or bad credit.
Most secured card issuers report your payment record to all three major credit bureaus. That helps you build credit.
A secured credit card will not say “secured” anywhere on the card. It is not a prepaid card or a debit card. It looks and works just like any other credit card.
A secured Visa card or Mastercard will be accepted anywhere that takes a regular Visa or Mastercard. You can get a cash advance from a secured card.
How Do Secured Credit Cards Work?
26 million Americans have no credit history at all. Another 19 million don’t have enough data in their credit file to generate a score. 68 million don’t qualify for most conventional loans or credit cards because their credit scores are too low.
Secured credit cards allow these Americans to get a credit card and enjoy the convenience, safety, and security that credit cards offer. They also offer an effective way to put a revolving credit line on your history and build a credit record.
Lenders use your credit score to predict your risk of default. If you have no score or your score is low, you have a high default risk. Secured credit cards control risk by requiring a deposit from the cardholder. If you don’t pay, the issuer keeps your deposit.
Aside from the security deposit, a secured card is just like any other credit card. You will usually have a low credit limit (unless you put down a large deposit), but other than that you can do anything with your secured card that you could do with an unsecured card.
Many secured cards will let you upgrade to an unsecured card if you establish a good payment record. (Also check out our Debit Cards That Build Credit article for other options.)
Applying for a secured credit card is generally easy. Requirements are low. Some issuers may only make a soft pull on your credit report, which will not affect your credit score. Some may not do a credit check.
Secured credit cards are available from national banks like Citi or Bank of America, national credit unions like Navy Federal, and many local banks and credit unions. If you have a savings account with a local bank or credit union, ask them about a secured credit card.
If you need business credit you can get a secured business credit card.
As with any credit card, you will want to check for annual fees and the annual percentage rate (APR). If you pay off your balance in full each month, you will not pay interest at all. You may not always be able to do that, so a lower interest rate is a good thing.
Cards with the lowest approval standards will often have higher annual fees and APRs. If you can qualify for a no-fee card with a lower APR, this will be a better choice.
Some secured credit cards offer limited cash back or other rewards. Remember that your credit limit will be low. You probably won’t be spending enough on your card to gain much from rewards, so they shouldn’t be a major factor in your choice. Focus on the fee and the APR! Also see our related article: How Long Does It Take to Build Credit With a Secured Credit Card?.
What’s The Difference Between a Secured Credit Card and a Regular Credit Card?
The biggest difference between a secured credit card and a traditional credit card is that a secured credit card requires a security deposit. Many cards have a minimum deposit as low as $200 and some allow you to pay your deposit in installments. (What Is a Secured Credit Card?)
Your security deposit becomes your credit limit: you can’t charge more on your card than you have on deposit.
That means secured cards usually have low credit limits. The average American credit card limit is over $30,000. Secured credit card limits are usually between $200 and $2500. (Also see our list of Best Credit Card for Contractors.)
A low credit limit means you’ll have to pay close attention to credit utilization. This is the percentage of your credit limit that you actually use. If your credit limit is $1000 and your balance is $300, your credit utilization is 30%.
Low credit utilization helps your credit score. Keeping credit utilization under 30% is good, under 10% is better. With a low credit limit, you will need to control spending carefully to stay under these percentages.
Card issuers offer rewards and specialized functions to attract customers with good credit. Secured cards are designed for easy qualification and credit building. Don’t expect high rewards, balance transfers, or a promotional APR.
Who Should Consider a Secured Credit Card?
Secured credit cards are designed to serve two main markets:
- People with no credit. If you don’t have a credit file or your credit file is too thin to generate a score, a secured credit card will add a revolving credit tradeline to your credit report and give you an opportunity to build a positive payment history.
- People with bad credit. Secured credit cards are available to people with bad credit. You may even qualify with a recent bankruptcy or multiple collection accounts. A secured card gives you the chance to balance out those negative records with a positive entry.
Secured cards provide these markets with two main benefits:
- Card use. Using a credit card is convenient, lets you avoid carrying cash, and provides fraud protection.
- Credit building. Using a secured card wisely can help you establish or build credit.
If you’re in one of those categories and need those functions, consider a secured credit card.
How Does a Secured Credit Card Help in Building Credit?
A secured credit card adds a revolving credit line to your credit report. This can help you build good credit history in several ways.
- Payment history. If you make every payment on time you will build a positive payment history. This is the single most important component of your FICO score.
- Credit utilization. If you keep your balance below 30% of your limit (lower is better) you will help your credit score.
- Credit Mix. If you already have an installment loan (like a student loan) on your credit record, a secured credit card will add a revolving account. This diversifies your credit mix and helps your score.
- Length of credit history. When you first get your secured credit card, it will shorten your history. The longer you keep the credit line active, the more the length of your credit history grows. The earlier you start establishing credit lines, the better.
Remember that your secured credit card account can also harm your credit. If they make late payments, they will be reported. If you max out your card, your credit utilization will damage your credit instead of helping it.
Using your card wisely will help your credit. Using it irresponsibly will damage your credit. Also check out our list of The Best Secured Credit Cards to Build Credit.
What Are the Disadvantages of a Secured Credit Card?
A secured credit card is a useful credit building tool. These cards still have some disadvantages, and it’s important to understand them before you apply.
- You will pay a security deposit. You will need to keep the deposit with the card issuer to keep the card open unless you upgrade to a conventional card. That cash deposit ties up some of your money.
- Many secured cards have annual fees. Check for cash advance fees and foreign transaction fees as well. The easiest cards to get typically have the highest fees. Look for a no-fee secured card if you can qualify.
- Low credit limit. Your credit limit will be fixed by your deposit and will be lower than the limit on most unsecured credit cards. Watch your credit utilization carefully!
- High APRs. Most secured cards have higher APRs than conventional cards. Remember that if you pay every bill in full by the payment deadline you will pay no interest at all.
- Limited features. Don’t expect high rewards, zero-APR promotions, or other special features on a secured credit card.
- Potential damage to your credit. If you don’t manage your secured card well, you could harm your credit score instead of helping it.
Remember that a secured credit card is not meant to be your permanent credit card. It’s a tool that you use to build the credit score you’ll need to get that feature-packed unsecured credit card you want. (Secured vs. Unsecured Credit Cards)
Do Secured Cards Have a Credit Limit?
Most secured credit cards fix your credit limit at the amount of your security deposit. If you deposit $200, your credit limit will be $200. If you want to raise the credit limit, you will have to deposit more.
Some secured credit card issuers may raise your limit above your security deposit if you establish a good payment history. Some may even convert your card to an unsecured card. See our article, How Much Will a Secured Credit Card Raise My Score? as well!
Can I Get My Security Deposit Back?
You will get your security deposit back if you close the credit card account or upgrade it to an unsecured card. Any outstanding charges will be deducted from the deposit. You may have to wait a fixed period of time for the issuer to confirm that there are no additional charges.
Check the terms and conditions of your card for detailed information on deposit return policies.
Remember that closing an account can harm your credit score. You will lower your total available credit, which could raise your credit utilization. Keeping your card or asking if you can upgrade to a conventional card could be a better choice, especially if your card has no fee.
Is a Secured Credit Card Better Than a Regular Credit Card?
Secured credit cards and regular unsecured credit cards are different. Neither product is inherently better or worse than the other. They have different purposes and they are designed for different types of users.
If you have no credit score or a poor credit score and you need a credit card or want a revolving account to help you build credit, a secured credit card will be a better choice.
If you have good credit and you’re looking for a credit card to handle your day to day spending needs, a regular card will be a better choice. You’ll have more options and features to choose from and the higher credit limit will make it easier to control your credit utilization.
As with most financial products, your choice isn’t about finding the best product. It’s about finding the product that best suits your individual needs!
Steve Rogers has been a writer and editor for over 30 years, specializing in personal finance, investment, and the impact of political trends on financial markets and personal finances. His work has appeared in The International Herald Tribune, Foreign Affairs, and The Journal of Democracy, among many others. He has a particular interest in making complex topics accessible and useful to non-specialist audiences. When he’s not working, he can usually be found paddling kayaks, rappelling waterfalls, riding mountain bikes, or coming up with new adventures for his two boys. On rare occasions he has been known to throw a shield.