THE BROKEN WALLET

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What is a secured credit card?

A secured credit card works like any other credit card—in that you use the card for purchases, and then pay the balance at a later time.

The difference, though, is that a secured credit card requires a cash deposit as collateral, typically equal to the card’s credit limit. This deposit serves as security for the issuer in case you default on payments.= 

But you might ask, why get a secured credit card instead of an unsecured card?

The reason is simple. If you apply for an unsecured credit card with no prior credit history (or bad credit), many banks will reject your application.  

Without an “established” credit history banks can’t determine your creditworthiness. In which case, you’re automatically labeled a “risky” applicant. You’re essentially shot down before given an opportunity to prove yourself. And if you have a bad credit history, some banks will conclude that you don’t have the skills to successfully manage credit. 

I know, it’s a catch-22.

A secured credit card, however, can help you overcome this hurdle. Some people apply for secured credit cards when building credit for the first time, and others apply when they need to rebuild their credit.

Related: What Affects Credit Score? Calculating FICO Scores

How do secured credit cards work?

A feature that separates secured credit cards from unsecured credit cards is that the former requires a security deposit. This deposit is a form of collateral. 

The minimum deposit for a secured credit card varies. Some banks will approve your application with a minimum security deposit as low as $250, whereas other banks allow security deposits up to $1,000. 

What’s interesting about the security deposit is that it determines your credit limit. In other words, if you give the bank a $500 deposit, you’ll get a secured credit card with a $500 credit limit.

Personally, I recommend Chime’s Credit Builder Secured Visa because there’s no minimum security deposit required. There’s also no credit check, no annual fee, and no interest. 

Is a secured credit card the same as a “prepaid” card?

Even though you’re required to pay a security deposit, a secured credit card is not a prepaid card. 

You’re not preloading money on a card for later use. Rather, these are actual credit cards. They have interest rates, late fees, and you’re required to pay back all charges.

You’ll receive a monthly statement each month, and you’re required to make a  minimum payment each month.

The bank issuing your card deposits your security deposit into an interest-bearing account, and they’ll only touch these funds if you default and don’t repay what you owe. 

A secured credit card is a steppingstone to an unsecured credit card. Once you’re approved for a secured credit card, it’s important that you make timely payments each month. This builds a positive credit history. 

This is important because after 12 to 24 months, the bank issuing your secured credit card will review your account. If you’ve demonstrated an excellent payment record, they may convert your secured credit card to an unsecured credit card, and then refund your security deposit.

How to build credit with a secured credit card?

• Don’t carry a balance from month-to-month. This is a credit card, so it’s possible to accumulate a high balance. To avoid high debt, pay off your secured credit card balance in full every month. Only charge what you can afford to pay back.

• Compare interest rates. Secured credit cards often have higher interest rates than unsecured credit cards. This is costly, if you carry a balance. Before applying for a card, shop around and compare rates and terms.
• Use a bank that reports to the credit bureaus. The purpose of a secured credit card is to build or reestablish your credit history. Therefore, choose a bank that regularly reports your credit activity to the three major credit bureaus (Experian, TransUnion and Equifax).

Ready to apply for a secured credit card?

Now that you know how secured credit cards work, go ahead and submit an application for one. You need credit to build credit, and a secured credit card is a pathway to a stronger credit history–opening the door to more attractive offers.

Did you find this information helpful, or got a question on how secured credit cards work? Let us know ↓↓

Secured Credit Card FAQ

What is a secured credit card?

A secured credit card is a type of credit card that requires a security deposit, typically equal to the card’s credit limit. This deposit acts as collateral and reduces risk for the issuer, making it easier for people with limited or poor credit history to obtain a card. 

How do secured credit cards work?

Secured credit cards require a security deposit. Cardholders use it like a regular credit card, building or repairing credit. Responsible use over time can lead to qualification for an unsecured card. If payments are missed, the issuer can use the deposit to cover the debt. With consistent responsible use, some issuers refund the deposit and transition the card to unsecured status.

What happens when you don’t pay off a secured credit card?

Failure to pay off a secured credit card results in consequences similar to those of a traditional credit card. The issuer may charge late fees, report missed payments to credit bureaus, and potentially seize the security deposit to cover outstanding balances. This can lead to a damaged credit score and difficulty obtaining credit in the future.