A secured credit card is a credit card that’s “secured” by a cash deposit you make when you open the account. The deposit typically acts as your credit limit, and the card functions much like a regular credit card. These cards are often marketed toward people who have a limited credit history or who are trying to rebuild bad credit.
This article provides a comprehensive overview of the secured credit card, including the benefits and drawbacks, and how to use one effectively to build or rebuild your credit.
How secured credit cards work
Secured credit cards work much like unsecured cards, except they require you to provide a security deposit as collateral.
The security deposit
Your cash deposit protects the card issuer if you don’t pay your bills. Often, your credit limit will be equal to the amount of your deposit, although some cards may offer you a higher credit limit than your initial deposit.
If you fail to pay, the card issuer can use your deposit to cover what you owe. If you close your account in good standing, the deposit is refunded to you.
Application process
Applying for a secured card is similar to applying for an unsecured card, with the exception that you have to provide a deposit.
The card issuer may check your credit, but their standards are often less rigid than with unsecured cards. As with any credit card, you’ll likely need to provide proof of your income and identity.
You’ll typically fund your security deposit through a bank transfer or a check.
What are the benefits of using a secured credit card?
Secured credit cards come with several advantages, especially if you’re trying to build or rebuild your credit history.
Building or Rebuilding Credit
The major advantage of a secured card is that it can help you build or rebuild your credit.
- Reporting to credit bureaus. Secured cards typically report your payment activity to the big three credit bureaus: Experian, Equifax, and TransUnion. If you make consistent, on-time payments, you’ll likely see your credit score improve.
- Opportunity for credit score improvement. Using a secured card responsibly shows lenders that you’re creditworthy. After several months of responsible use, you may be approved for an unsecured credit card.
Access to Credit
A secured credit card gives you access to credit when you might not otherwise have it.
- An alternative to cash or debit cards. A secured card is a convenient way to make purchases, especially online transactions and reservations.
- Emergency fund buffer. A secured card can offer a line of credit for unexpected expenses.
Potential for Rewards and Perks
Some secured cards offer rewards programs, so it pays to shop around.
- Rewards programs. Some secured cards offer cash back, points, or miles on purchases. These perks aren’t as common as with unsecured cards, but options do exist.
Drawbacks and considerations
Although secured credit cards can be a useful tool, it’s important to know what you’re getting into before you apply for one.
Security deposit requirement
To open a secured credit card, you’ll have to put up a sum of money as collateral. That means tying up funds that you might prefer to use for something else. The money isn’t accessible to you as long as the account is open, and you’ll be missing out on the opportunity to invest those funds elsewhere.
Different cards have different deposit requirements, too. Some may not be suitable for people with limited savings.
Fees and interest rates
Secured cards often come with higher interest rates than unsecured cards, so it’s important to pay off your balance in full each month. Before you apply, make sure you know what the card’s APR (annual percentage rate) is.
There may be annual fees and other charges, too. Compare fee structures before deciding on a card, and look for cards with no or low annual fees.
Lower credit limits
Your credit limit is tied to the amount of your security deposit. That might not be enough to cover all your spending needs, although you can often increase your credit limit by adding to your security deposit.
How to choose the right secured credit card
Shopping for a secured credit card requires some research and comparison. Here are a few things to keep in mind:
- Interest rates (APR): Look for the lowest possible rate to avoid unnecessary interest charges.
- Fees: Some secured cards come with annual fees or transaction fees. Compare these carefully.
- Rewards programs: A few secured cards offer cash back or other rewards, which can be a nice bonus.
- Credit reporting: Make sure the card issuer reports your payment activity to all three major credit bureaus (Experian, Equifax, and TransUnion). This is essential for building credit.
- Issuer reputation and customer service: Do some research on the card issuer. Read customer reviews to get a sense of their reliability and customer service quality.
The Bottom Line
Secured credit cards can be a powerful tool for building or rebuilding credit, but it’s important to weigh the pros and cons. While they offer an accessible path to creditworthiness, they require a security deposit and may come with higher fees than unsecured cards.
If you decide to get a secured credit card, use it responsibly. Pay your balance on time, every time, and keep your credit utilization low. Doing so will not only improve your credit score but also pave the way for approval for an unsecured credit card in the future.