What Is a Secured Credit Card and How Does It Work?
A secured credit card is a credit card backed by a cash deposit you pay up front. The deposit usually sets your credit limit and protects the issuer if you don’t pay. You use it like a regular card, and on-time payments are reported to the credit bureaus, which can help you build or rebuild credit.
Because the deposit lowers the lender’s risk, secured cards are often easier to get if you have a limited credit history or a low credit score. Here’s how they work, how they differ from other cards, and what to consider before you apply.
Key takeaways
- A secured card requires a security deposit. Your credit limit is often equal to your deposit, though some issuers may offer a higher limit.
- They may be easier to get if you have limited or poor credit history.
- Responsible use (on-time payments, low utilization) may help you establish a positive credit history.
- Many secured cards offer a path to upgrade to an unsecured card over time.
What Is a Secured Credit Card?
A secured card is a type of credit card that requires a cash deposit to secure the credit line. The deposit serves as collateral. That reduces the lender’s risk, which is why these cards may be easier to get with limited or poor credit history.
The amount of your deposit typically sets your credit limit. For example, if you deposit $300, your credit limit will likely be $300. The deposit is usually refundable once you close the account in good standing or move to an unsecured card.
A secured card is still a credit card, not a debit or prepaid card. You borrow against your limit, get a monthly bill, and may pay interest on any balance you carry.
How Does a Secured Card Work?
A secured card works much like a traditional, unsecured credit card, with one key difference: the security deposit. Here’s how it typically works:
- Application and deposit: You apply for the card and, if approved, make a security deposit. The issuer holds the deposit as collateral.
- Credit limit: Your credit limit is usually equal to your deposit, though some issuers may offer a slightly higher limit.
- Making purchases: You can use your secured card for everyday purchases, just like any other credit card.
- Monthly payments: You’ll get a monthly statement and must make at least the minimum payment by the due date.
- Building credit: The issuer reports your payment activity to the major credit bureaus. Paying on time and keeping your credit utilization low can help you build a positive credit history over time.
- Deposit refund: Some issuers review your account after several months and may offer to convert your secured card to an unsecured card and return your deposit. If you close your account in good standing, your deposit is also refunded.
What to Check Before You Apply
- Bureau reporting: Confirm the issuer reports to the major credit bureaus. If it doesn’t, the card won’t help you build credit.
- Fees: Compare annual fees and other charges, which can eat into a small credit limit.
- Upgrade path: Ask whether and when the issuer reviews accounts for an upgrade to an unsecured card.
Frequently Asked Questions
Yes, a secured card can hurt your credit if it isn’t managed responsibly. Late payments, high credit utilization or defaulting on the card can lower your credit score. Used carefully, though, a secured card is a common way to establish or rebuild credit.
If you default, the issuer may apply your deposit toward the balance. Missed payments may still be reported to the credit bureaus and can harm your credit.
It varies from person to person. Building credit generally takes several months or more of consistent, responsible use, and how your profile changes depends on your overall credit history. Pay every bill on time and keep your utilization low. Our guide on how long it takes to build credit explains what affects the timeline.
Sometimes, but many issuers do run a credit check, which may be a hard or soft inquiry depending on the provider. The check helps them verify your identity and review your finances. Requirements are generally less strict than for unsecured cards.
Not necessarily. If the issuer converts your secured card to an unsecured one, the account and its history usually stay open. If you close a secured card instead, it can affect your utilization and credit history the same way as any other card. Learn more about whether closing a credit card hurts your credit.
Is a Secured Card Right for You?
A secured card can be a practical first step if you’re building credit for the first time or rebuilding after setbacks. Knowing how it works and using it responsibly can help you build a stronger credit history. Consistent on-time payments and careful spending are what make the card worthwhile.
It also helps to know what’s already on your reports, so consider getting all three of your credit reports first. Credit Saint can review your reports and challenge items that may be inaccurate, unverifiable or outdated.
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Ashley Davison
EditorAshley is currently the Chief Compliance Officer for Credit Saint, previously the Chief Operating Officer. Ashley got into the Financial world by working as a Logistics Coordinator at Ernst & Young. Coming from a previous career in education, she is eager to teach the world everything she knows and learn everything that she doesn’t! Ashley is a FICO® certified professional, a Board Certified Credit Consultant, a Certified Credit Score Consultant with the Credit Consultants Association of America, UDAAP certified, and holds a Fair Credit Reporting Act (FCRA) Compliance Certificate.