What Is a Secured Card?

A customer uses a credit card to make a purchase in a boutique.
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DEFINITION
Secured cards are credit cards that require you to pay a deposit before you can get access to a credit line.

Secured cards are credit cards that require you to pay a deposit before you can get access to a credit line.

If you have no credit or bad credit and you need a credit card, you might want to consider a secured credit card, especially if you don’t qualify for a typical unsecured credit card. Learn more about how they work, the pros and cons, and what to look for when choosing a card issuer.

Definition and Example of Secured Cards

A secured credit card works like a normal unsecured credit card for making purchases, but you have to pay a deposit. The bank holds onto your deposit, then extends you a credit line based on the amount of your deposit.

For example, the Capital One Platinum Secured card requires you to pay a refundable deposit of at least $49, $99, or $200, depending on your creditworthiness.

Once you’re approved and pay the deposit, you’ll get approved for a $200 credit line. (With a $49 or $99 deposit, your credit card is only partially secured.) You can deposit up to $1,000 and your credit line will be equal to your deposit amount.

How Secured Cards Work

Card issuers require deposits as collateral for your credit line so they can cover their losses if you don’t pay as agreed. It’s a way for them to lower the risk of lending to someone with an insufficient or unsatisfactory credit history.

For example, say someone just turned 18 and had no credit. They are ready to start using a credit card to make purchases more convenient, so they apply for an unsecured card. However, because of their lack of credit history, they are denied. In this hypothetical scenario, this person may benefit from applying for a secured card.

With a secured credit card, the borrower may have to pay, say, a $200 deposit to get a $200 credit line. They then can use the card for their purchases just as they would use any credit card. 

Borrowers can use secured credit cards to improve their credit scores and credit history so they can be approved for unsecured cards and other financial products in the future.

To do that, they need to prove they can make at least the minimum payments regularly and on time. To use a secured credit card to improve your credit, make sure you use one that reports to the three main credit bureaus: Equifax TransUnion, and Experian.

Often, the amount of your credit line is equal to your deposit. However, some card companies offer a credit line that’s higher than your deposit, meaning the card is partially secured.

Beware of cards that claim to offer “guaranteed approval.” Secured cards still have eligibility requirements that must be met.

Card issuers also sometimes raise your credit limit after you’ve made a certain number of on-time payments. Further, they may upgrade secured accounts to unsecured accounts after cardholders make consistent on-time payments.

Like any other credit card, you can use secured cards to make payments and purchases up to your credit limit. Each month you carry a balance, you’ll be required to make a minimum payment. If you pay your full balance off by the due date each month, you won’t typically be charged interest. If you don’t pay in full, you’ll be charged interest on the balance you carry over.

Once you make a payment toward your balance, that amount of credit will become available again.

Pros and Cons of Secured Cards

A secured card can be a stepping stone that helps you build good credit, but it does have downsides to consider. Here are the pros and cons you should know.

Pros
  • Easier approval

  • Helps establish credit

  • Refunded deposits

  • Potential for unsecured credit line

  • Rewards

Cons
  • Requires deposit

  • Lower credit limits

  • Generally higher interest rates and fees

  • Lower rewards

Pros Explained

  • Easier approval: Lenders are more likely to approve people with no credit or bad credit because securing the card with a deposit lowers the risk. 
  • Helps establish credit: Secured card issuers usually report to the three main credit bureaus, which can help you build your credit if you make payments on time.
  • Refunded deposits: Card issuers often refund your deposit if you make consistent on-time payments or when you close and pay off your account.
  • Potential for unsecured credit line: Some issuers will raise your credit line and upgrade you to unsecured status if you show responsible use.
  • Rewards: You may be able to earn rewards like cash back, depending on the credit card terms.

Cons Explained

  • Requires deposit: Secured cards require a deposit upfront, which helps lower the risk for the lender.
  • Lower credit limits: Secured cards often come with relatively low credit limits that are based on the amount of deposit you provide.
  • Generally higher interest rates and fees: They may have fees and higher interest rates because the borrowers tend to be riskier.
  • Lower rewards: In general, the rewards aren’t as high for secured credit cards as you might find with unsecured cards.

While secured cards often won’t have the most attractive rates, terms, and rewards, they’re a good starting point if you can’t get approved for an unsecured card yet. You can use them to build a positive credit line and work toward qualifying for better credit cards in the future.  

How to Get a Secured Card

If a secured credit card sounds right for you, shop around to find the best secured card for you. The key factors to look at when comparing cards are:

  • Deposit amount and credit line: Look for a deposit amount that suits your budget and gives you the highest credit line for your money. 
  • Annual fee: Compare credit card fees and aim for a card with no fee or a low fee. 
  • Annual percentage rate (APR): Review APRs because they will apply to any balances that carry over from month to month.
  • Refundable deposits: Make sure your deposits are refundable, either before you close your account or when you close it.
  • Unsecured credit line upgrades: To improve your credit history, look for card issuers that regularly evaluate your account for credit line increases.
  • Other fees (foreign transaction, replacement card, balance transfer, etc.): Understand all the miscellaneous fees of a credit card that could add up. 
  • Rewards programs for your spending: Some cards reward you for using the card with cash back or points. The more kickbacks you get, the more value you can get from a credit card.
  • Cardholder reviews: Check what other cardholders have to say about the card and their experiences with the company. Look for positive reviews.

Once you find a card with a competitive overall offering, you can apply just as you would any credit card, typically with a straightforward online process. Once you’re approved, you’ll pay the deposit and receive your new secured card in the mail.

Key Takeaways

  • Secured cards are credit cards that require a deposit before you can get a credit line.
  • The deposit acts as collateral for the credit line to reduce the issuer’s risk.
  • Secured cards are a good way to build credit if you have no credit or bad credit.
  • Be sure to comparison shop for secured cards and compare the terms and conditions to find the right card for you.

Article Sources

  1. Consumer Financial Protection Bureau. “Building Credit From Scratch.” Accessed Dec. 9, 2021.

  2. Capital One. “Build Credit with a Secured Credit Card.” Accessed Dec. 9, 2021.