What Is a Secured Credit Card?

Kim Franke-FolstadUpdated December 1, 2021

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When you’re thinking about getting a new credit card, the available options can seem endless — unless you have a limited credit history or your credit score isn’t so great. In this instance, a secured credit card may be the solution you’re looking for.A secured credit card can help you build your credit (and also function in a world heavily reliant on plastic) when you’re struggling to find a credit card company that will approve you for any type of card. Read on to learn how a secured credit card works and how you can get one.

Secured Credit Cards Defined

A secured credit card is backed by a cash deposit that serves as collateral for the account. The deposit amount (typically a minimum of $200) determines the card’s credit limit. Secured credit cards generally are geared toward consumers who hope to improve a damaged credit score or those who are new to using credit and want to establish a positive credit history. These borrowers may struggle when it comes to getting a traditional, unsecured credit card. Because the deposit reduces the risk that the cardholder will default, credit card companies are more likely to approve a secured account than an unsecured account. Many financial institutions offer secured credit cards, including some of the largest (think Capital One, Citi and Discover), but smaller banks, credit unions and online-only financial companies also issue them. These accounts often come with benefits that are useful to consumers who want to keep their finances on track.

How Secured Credit Cards Work

A secured credit card works like any other credit card works, with one essential difference: The card issuer requires the cardholder to provide a refundable security deposit when they open the account. That may sound like pretty much the same thing as a prepaid debit card. But with a secured credit card, the card issuer doesn’t use the money you deposit to pay for the things you buy. Instead, you’ll get a monthly statement, just as you would with a traditional credit card. And you’ll be expected to make at least the minimum payment on time. It’s also important to note that, just as with a traditional card, you’ll incur interest on any unpaid balance you carry forward from one month to the next. That interest can add up and quickly eat into the amount of credit you have available. Say, for instance, you put down a $500 deposit, meaning you’ll have a credit limit of $500. If you make a purchase of $150, your remaining available credit will be $350. Should that balance carry over, your credit limit will dip lower since your balance will increase due to interest getting tacked on. The upside of using a secured credit card vs. a debit card, though, is that if you borrow responsibly and repay regularly, the credit card company will report that positive activity to the credit bureaus — which, over time, could help boost your credit score. Of course, if you make too many late payments or default, the card company may use your deposit to get back any money you owe. (Much like a landlord keeps a security deposit if a tenant doesn’t pay the rent.) You could lose your card, as well. Plus, the negative activity will be reported to the credit bureaus, which could take a toll on your credit.

Secured Credit Card Terms

The costs tied to using a secured credit card don’t stop with the deposit. Some secured credit cards may charge higher interest rates and fees than unsecured cards.You can check out a credit card’s terms using a link on the credit card company’s website. Some costs to consider as you choose a card include:

Annual Percentage Rate (APR)

Most credit cards charge a variable annual percentage rate (APR), which is typically based on a benchmark rate (like the prime interest rate). You may feel as though you have to take whatever APR you can get if you’re applying for a secured Visa or Mastercard. But it’s worth shopping around a bit to save what you can — especially if you expect to carry a balance (even a small balance) on your account.

Annual Fee

Many secured credit cards come with an annual fee. (As do many unsecured credit cards.) Annual fees aren’t necessarily bad, but when you’re comparing cards, it’s always a good idea to look at the overall costs compared to what you’re getting for your money. (In other words, price vs. perks.)

Activation and Other Fees

Other fees to watch for may include a card activation fee (a one-time charge to set up the account), balance inquiry fees and maintenance fees. The types of fees charged can vary from one card to the next — and some cards may have low or no fees. Weighing the differences now could help preserve your account balance when you open your card and over time as you use it.

Deposit Requirements

The deposit required to open a secured card also can vary from one issuer to the next. The typical minimum is $200 or $300. You may be able to deposit as much as $5,000 or even $10,000 on some cards, if you want to have a higher limit. You’ll need to have the money transferred to the issuer before your card is activated. The card company will keep the deposit until you transition to one of its unsecured cards or close your secured account (as long as the account is paid up).

Do Secured Credit Cards Affect Credit Credit Score?

When you open a secured credit card, the issuer should begin sending information about the account, such as your spending limit, payments you make or miss and the balance, to one — and preferably all — of the credit bureaus every month. If you aren’t sure if a credit card issuer you’re considering reports to at least one of the three major credit bureaus (Experian, TransUnion or Equifax), you may want to call and ask. If they aren’t sending updates, your credit reports and credit scores won’t accurately reflect your positive payment history. If you’re new to borrowing, using a secured card responsibly can help you prove you’re a conscientious money manager. A history of making on-time payments is the biggest factor in determining credit scores. Thus, staying current with your bills and keeping a low credit utilization ratio (the amount of credit you’re using vs. what’s available to you) can help you compile a favorable credit file. It may take a bit longer to improve your scores if you’re working to overcome a negative credit history. But again, consistency is key. Using a secured card in moderation and paying on time can help you in your comeback. Eventually, if all goes well, the card issuer may offer you an unsecured credit card, or you can apply for an unsecured card through another company.

Secured Credit Cards vs. Unsecured Credit Cards

The biggest difference between secured and unsecured cards is the required security deposit. But you may find there are other subtle differences in how these two types of cards work. Here are a few.

Pros and Cons of Secured Credit Cards

A secured credit card can be a useful tool for reaching your financial goals. But like any decision related to managing your money, there are pros and cons to secured cards.

Getting a Secured Credit Card

Once you’ve decided that a secured credit card is right for you, you may want to spend some time researching and selecting a credit card. Besides finding the most competitive APR and fees and deposit requirements for your situation and checking your card company reports to the credit bureaus, you also can shop for the types of benefits that give a card added value.Some things to look at might include:

Can you use the card anywhere or will your options be limited? Some “closed-loop cards” can be used only at specific stores or for a certain family of brands.
If the card offers cash back rewards, miles or points, how do you earn them, how quickly can you earn them and how difficult will it be to redeem them?
What kinds of extra perks come with owning the card, and are they benefits you’ll really use?
How much will the benefits cost? Paying an annual fee to get a card based on the rewards may only make sense if what you get exceeds what you’ll pay for the opportunity.
Does the credit card issuer offer unsecured credit cards? And do you have an understanding of what you’ll have to achieve (for example, making on-time payments for a year) in order to earn an upgrade?
How likely are you to be approved for the card? Secured cards are typically easy to get, even if you have a low credit score, but you still may want to look for a card issuer that offers preapproved secured credit cards. Though there’s no guarantee you’ll get the credit card until you actually apply, some companies use a prescreening process to show consumers which cards they’re more likely to receive based on a soft credit pull that doesn’t affect their credit scores.

You can find the answers to these questions by going directly to each credit card company’s website. Or you can use a comparison site, like Lantern, to help narrow the field. Once you decide on the card you want and make your application, the credit card company will do a hard credit inquiry to determine if you fit their approval criteria or if you’re too big of a risk. That credit check may temporarily lower your credit score by a few points, but if you make on-time payments, your score should rebound within a few months. If you’re approved, your next step will be to make the deposit that will act as collateral for your account. Then your card can be activated, and you may begin making purchases.

Using a Secured Credit Card: Tips and Tricks

There’s no doubt about it: Using a credit card makes buying just about anything easier — maybe too easy — whether it’s a loaded bagel or a big-screen TV. But remember, the point of using a secured credit card is to get your finances on track.Here are some ways to make your secured card work for you.

Keep Monthly Bills Manageable

Charging just a few small purchases each month could make it simpler to pay your bills on time while you build your credit. Focus on making at least the minimum payment, and if you can, avoid carrying any balance forward, so you won’t have to pay interest.

Watch Your Limit

Try to avoid creeping too close to your card’s credit limit. Remember, your credit utilization ratio — the amount of your available debt that you’re using — is a big factor in determining your credit score. (Many experts recommend staying below 30%, but lower is even better.) And, just as with a traditional credit card, if you go over your limit trying to make a purchase, the transaction could be declined.

Set Payment Alerts or Enroll in Auto-Pay

If you’re good with a budget but just so darn busy you’re worried about missing a payment, you don’t have to risk it. Put technology to work. You can set an alert on your phone or have your credit card company text you when your bill’s due date is near. Or you can sign up for autopay and have the money deducted from your bank account each month.

Don’t Skip Payments

It may be tempting to think of your security deposit as a backstop if you can’t make a payment, but that’s not how a secured card works. You’re still responsible for those monthly bills. And if you miss a payment, the credit score you’re working so hard to build will likely suffer.

Secured Credit Card Alternatives

Most people have to have some way to make payments when they can’t use cash. But what if you can’t get — or don’t want — a secured credit card? There are some other options.

Debit Cards

A debit card can serve as a replacement for a credit card in many situations — and for some people, it may even be a better option. But using a bank debit card or prepaid card can’t help you build your credit because the money you’re using when you make a payment with a debit card is your money. You aren’t borrowing it and paying it back to a financial institution, and that’s the activity that affects your credit score.

Payment Platforms

Payment platforms like PayPal, Zelle and Venmo allow users to easily send money to other people, and they are often used to make purchases. But again, these systems aren’t credit-builders — and they don’t provide the same consumer protections that credit card companies can offer.

Unsecured Subprime Credit Cards

Some lenders will issue credit cards to consumers with a low or “subprime” credit score without requiring a security deposit. Because these borrowers are considered a risk, subprime cards typically have a higher APR, higher fees and lower limits than other cards. But users who can afford the higher costs and manage their card responsibly may prefer to use a subprime “credit builder” card.

Student Credit Cards

Many credit card companies offer cards designed specifically for full- and part-time college students. These cards don’t require collateral, and the borrower doesn’t have to have a long credit history to qualify. (Although a student who doesn’t have a part-time job or independent assets may need a parent to co-sign).

The Takeaway

If you’re trying to build or rebuild your credit, a secured credit card can offer an opportunity to get and stay on track. You’ll have to come up with a deposit to get started, but after that, you can enjoy the same conveniences — and many of the same cardholder benefits — that traditional credit card users get. And if you consistently use your card responsibly, you can plan to eventually get your deposit back and move on to an unsecured card.Looking for a credit-building credit card? With Lantern, you can conveniently review and weigh credit cards that are available, including secured credit cards.

Photo credit: iStock/Chainarong PrasertthaiThe tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website on credit (https://www.consumer.ftc.gov/topics/credit-and-loans)SOLC1021236

About the Author

Kim Franke-Folstad

Kim Franke-Folstad is an award-winning journalist with 30 years of experience writing and editing for newspapers, magazines and websites. Her work for SoFi covers a range of topics related to personal finance, including budgeting, saving, borrowing, and investing.

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