Secured Credit Card

Secured credit card summary:

• A secured credit card is backed by the cash deposit you make. 

• The deposit acts as collateral.

• A secured credit card could help you build or rebuild your credit score.

Secured credit card definition and meaning

A secured credit card is a type of credit card. It looks just like any other credit card. The main difference is that you have to pay a deposit to get the card. Here’s how it works:

• You secure the card with cash. When you apply for a secured credit card, you're responsible for providing a cash deposit—typically $200 to $500+. Usually, this deposit determines the card's credit limit. For example, if you provide a $500 cash deposit, you can expect a $500 spending limit. 

• A secured card works like a regular credit card. You use it just as you would any other credit card. Once you make a purchase, you're responsible for paying the bill. You could pay off the whole balance each month, or you could send in a smaller amount as long as it meets the minimum payment requirement.

• Secured credit cards can be a good way to build your credit score. Most secured credit cards are reported to the credit bureaus. Make sure your card does, or it won’t help you build credit. If you keep the balance low and pay on time every month, using the secured credit card could help you improve your credit score. 

• If you default, you could lose your deposit. Your deposit isn’t an advance payment against your transactions. The issuer will only keep your money if you fail to pay your balance.

• Responsible use is often rewarded. Many credit card issuers automatically transition you to a traditional card after a certain number of consecutive on-time payments. When this happens, they’ll return your deposit to you. If it doesn’t happen automatically, you could apply for a traditional credit card after six to 12 months of responsible use of your secured account. 

You can close your secured account, fully pay off your balance, and request the return of your deposit at any time.

More about secured credit cards

Whether you're just starting out or want to rebuild your credit history, a secured credit card could help you do just that. 

Interest rates on secured credit cards tend to be on the high side. You could avoid paying interest if you pay off your balance each month by the due date. 

Secured credit card fees are all over the map. Look over a card’s fees carefully before you apply. Fees you might encounter include:

• Application fee

• Monthly maintenance fee

• Annual fee

• Balance inquiry fee

• Cash advance fee

• Paper statement fee

• Live customer service fee

As with any other credit card, you want to use a secured card responsibly. That means never maxing out the card or missing payments. Since the card issuer reports monthly to the credit reporting agencies, this is your chance to build a positive credit profile by making sure all monthly reports say good things about your card use. 

Secured credit card: a comprehensive breakdown

Not all secured credit cards are the same. When it comes to finding the right secured card for you, here's what you want to look for: 

• How much you'll need to deposit. Check the minimum and maximum deposits allowable to make sure you can afford to get started. 

• Check the interest rate. Compare the annual percentage rate (APR) among cards. The lower the rate you snag, the less you'll pay in interest if you carry a balance from month to month. 

• Compare fees. Fees vary by card issuer, so look for all costs associated with a particular card. 

• Make sure the card issuer reports to the credit bureaus monthly. The primary perk of a secured credit card is that it helps you improve your credit score, thanks to monthly reports from the card issuer. Double-check that any issuer you're considering makes those reports. It’s best if they report to all three credit bureaus.

• Consider rewards. Some secured cards offer rewards, like cash back on purchases. While rewards aren't as common with secured cards as traditional credit cards, they're a perk worth looking into.

• Option to upgrade. Some secured card issuers offer the chance to upgrade to an unsecured card after a period of responsible use. If it’s not an option, you’ll have to apply separately for an unsecured card in the future.

• Refund policy. Study the terms to learn how and when you can have your security deposit refunded.