What is a Secured Credit Card?

Do you have bad credit or no credit at all? If so, you may have a hard time getting a credit card, and you may have already experienced it firsthand.

One way around this less-than-ideal credit situation is to get a secured credit card. Secured cards remove the risk for the card issuer, so you’ll likely have an easier time getting one compared to an unsecured card. But how do secured cards work? Where can you use them? How else can you improve your credit?

Read on to understand what is a secured credit card, the differences compared to unsecured cards, and whether a secured card is right for you. You’ll also find more ideas to help raise your credit score this year.

Overview: Secured credit cards defined

A secured credit card is a credit card that has collateral. That means you have to put money down in the form of a deposit to open the card. The credit card company keeps your deposit if you stop paying your bills. A secured credit card can help you build credit, whether you have no credit history or need to rebuild credit after bankruptcy.  

The difference between secured and unsecured credit cards is in the risk to lenders when you take on debt. There are two major kinds of debt: secured and unsecured debt. 

Secured debt is backed by collateral, which is actually a type of assurance to the lender that guarantees that the person taking out the loan will pay it back. For example, a mortgage is a secured debt because it’s tied to your home with a notice called a lien.

If you decide to stop making your mortgage payments to your bank, the bank can seize your house and sell it. Secured debts are easier to get because banks and other lenders have the collateral to back them up. In the case of a secured credit card, the line of credit is secured with a cash deposit. 

Unsecured debt doesn’t have any collateral. Unsecured debts are riskier for banks and lenders because there’s little recourse they can take if you stop making payments. Normal credit cards are unsecured debt as they aren’t backed by collateral.

Personal loans and student loans are other examples of unsecured debt.  

How do secured credit cards work?

You can get a secured credit card by filling out an application and putting down a deposit. Your bank or credit card company then issues you a line of credit that’s equal to the amount that you put down. For example, if you put down $500 to open a secured card, you can make up to $500 worth of purchases with your new card. 

Beyond that, a secured card works exactly the same as any other credit card. Each month, you’ll have to make at least one minimum payment, and your credit card company will charge you interest on what you borrow.

Your credit card provider will generally refund the initial deposit you paid if you decide to close the card. If you stop making payments, the credit card provider can keep your deposit. 

Secured vs. unsecured credit cards: What’s the difference?

The main difference between a secured card and an unsecured card is the deposit requirement. Secured cards require you to put down a deposit when you open the card. Unsecured cards don’t require you to put any money down except for annual fees the card requires.

Secured cards usually have much lower credit limits than unsecured cards, thanks to the deposit requirement. Expect your secured card limit to range from $200 to $1,000, depending on your provider.

Secured cards usually have fees in addition to the deposit. You might have to pay an annual fee, an application fee, or a processing fee to maintain your card. Often, secured cards have higher interest rates than unsecured cards because there’s less market competition for secured cards compared to unsecured cards.

Not sure if a secured credit card or an unsecured card is right for you? Consider how you want to use the card. If you want a credit card so you can build credit and make small, everyday purchases, a secured card is a great choice.

If you want to make a few large, one-time purchases on your card, you’ll probably need an unsecured card. For example, If you want to upgrade your home appliances or purchase a new computer to work from home, a traditional, unsecured credit card gives you greater flexibility. Likewise, if you’re already carrying credit card debt, a balance transfer to a 0% APR card can save you more on interest while you work to pay it off. 

For that reason, a secured credit card is usually a stepping stone to a positive credit history and an unsecured credit card. Ask your credit card company about review periods. Some major credit card providers allow secured cardholders to transition to an unsecured card after a certain number of on-time monthly payments. 

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Benefits of using a secured credit card

Secured credit cards offer a few benefits over unsecured cards.  

1. Looser credit requirements

The biggest benefit of opening a secured card is that credit card companies aren’t typically as strict with credit requirements. If you have bad credit or no credit, you’ll still be able to open a secured card as long as you can pay your initial deposit. 

2. Reporting to credit bureaus

Most secured credit cards come from major credit card providers and will automatically report your payments to credit reporting bureaus. This means that you can use a secured card to help raise your credit score by making regular, on-time payments each month.

Be aware that reporting can also hurt you if you miss a payment or you make your payments late. 

3. Transition to an unsecured card

Do you prefer an unsecured card but can’t get one due to a low credit score? Some credit card companies allow you to prove yourself as a responsible borrower with a secured card.

After a certain number of months, you may be able to switch your card to an unsecured version as long as you make your payments on time. This typically takes less time than it would to wait for your credit score to rise. 

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Things to consider when getting a secured credit card

If you’re considering a secured credit card, there are a few requirements to keep in mind. 

1. Requires a security deposit

To obtain a secured credit card, you will need to provide a security deposit as collateral. This deposit is typically equal to the credit limit of the card. While the deposit is refundable, it ties up funds that could be used for other purposes. 

Even obtaining a $500 credit line on a secured credit card means you can’t earn interest through savings or invest that money. For that reason, if you can get an unsecured credit card or transition to an unsecured credit card after some time, you’ll have more flexibility in how you use the funds.  

2. Higher fees and interest rates

Secured credit cards typically come with higher fees and interest rates compared to traditional credit cards. Annual fees, application fees, and processing fees can add up and increase the overall cost of using the card. Some unsecured credit cards come with no annual fees, offering greater options to save and use credit without high fees. 

3. Limited credit limit

Secured credit cards often have lower credit limits compared to traditional credit cards. This can restrict the purchasing power of cardholders and make it difficult to make larger purchases or handle unexpected expenses. Since you’ve already deposited cash for the available credit line, a secured credit card isn’t a realistic option to deal with emergency expenses. 

How to build credit with a secured credit card

Have you decided that a secured credit card is right for you? Using your secured credit card the right way can help you raise your score. Use these tips for how to manage credit to get the most from your secured card.

1. Control your spending

Even with a limited credit line, it can be tempting to overspend as soon as you have a credit card in your hands. Try to limit your credit card usage to small, occasional purchases that you can pay off quickly. This keeps you out of the debt trap and helps you avoid monthly interest charges.

Watch your credit utilization, which is the amount of total credit you use on your credit card. You would calculate your credit utilization by dividing your credit card balance by your credit limit. Let’s say your credit card balance is $200, and your credit limit is $1,000. Then, multiply that result by 100 to get your credit utilization percentage. The formula is:

$200/$1,000 = 0.20

0.20 x 100 = 20%

In this case, credit utilization is 20%. In general, it’s a good idea to keep your credit utilization below 30%. That means if you’ve got a $500 limit, you’ll want to avoid charging more than $150. 

2. Make more than the minimum payment

The best way to quickly improve your credit score is by paying off your balance in full every month. If you can’t handle that, try to pay at least a little more than the minimum.

Just $10 more a month can help to reduce your credit utilization rate and improve your credit score. Going above and beyond with payments shows credit card providers that you only borrow as much as you can afford to pay back. 

3. Set payment reminders

Even the most organized person in the world can forget a credit card payment due date. Make life a little easier on yourself by setting multiple payment reminders. You can set an alarm using your phone’s calendar app, or you can mark the payment date on a physical desk calendar or planner.

Many credit card providers allow you to opt into text and email reminders a few days before your due date. You can contact your credit card company and authorize automatic bill pay. This feature deducts your minimum balance automatically each month. Be careful to maintain a sufficient cushion in your bank account, as withdrawals still go through even if your account will overdraft.

Securing Your Financial Future with the Right Card

The right credit card can be an asset when it comes to building your credit. And if you have bad credit or no credit, a secured card can be the saving grace that starts you on the path to a better score. All you need to do to apply for a secured card is fill out and submit an application. With responsible use, you’ll be well on your way to a positive credit history and building a good credit score. See more about credit card considerations here. 

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