A secured credit card is often recommended for consumers who have trouble getting a traditional credit card—consumers who haven't yet established a credit history or who have damaged credit.
A secured credit card is very much like a regular credit card, but the major difference is that you're required to make a deposit against the card's credit limit. Your credit limit will usually be a percentage of your security deposit or it may be the same as your deposit. Many banks place your deposit into an interest-bearing savings account where it stays until you close your account, upgrade to an unsecured credit card or default on your credit card balance.
Secured Credit Cards vs. Regular Credit Cards
Aside from the security deposit, secured credit cards are like most other types of credit cards. Purchases you make on a secured credit card reduce your available credit and you're required to make monthly minimum payments toward your credit card balance. If your secured credit card has a grace period, you can avoid paying finance charges by paying your balance in full each month. Late payments and over-the-limit transactions are penalized with a fee.
Secured credit cards often have more fees than unsecured credit cards. It's common to pay an annual fee and an application fee. Some of the worst secured credit cards charge high-interest rates, monthly account fees, and even credit limit increase fees.
You Still Have to Make Payments
Even though your credit limit is secured with a deposit, you're still required to make regular minimum payments on your balance. Any late payments will be reported to the credit bureau and will hurt your credit score. If you default on the credit card by falling several months behind on your payments, your account will be closed and you'll lose your security deposit.
Who Benefits From a Secured Credit Card
Regular credit cards have stricter credit qualifications that make it hard for people with bad credit and no credit to be approved for these cards. Consumers who have trouble getting approved for traditional credit cards often get approved for a secured credit card much easier than a regular credit card. Getting a secured credit card is an opportunity to prove you can use credit cards responsibly. After a few months, you have a better chance of getting approved for regular credit cards.
Even people with good credit - those who don't have trouble getting approved for regular credit cards - can benefit from a secured credit card. For example, you may want a bigger credit limit than you can be approved for. Making a security deposit of $5,000 or even $10,000 would give you a bigger credit limit and make it easier to get approved for similar credit limits on an unsecured credit card.
Converting to Unsecured Credit Card
Some secured credit cards review your account after a certain amount of time, e.g. 12 months, and upgrade you to an unsecured credit card if you qualify. You can improve your chances of qualifying for an unsecured credit card by making your payments on time and keeping your credit card balance low. Even if your secured credit card issuer doesn't upgrade you to an unsecured credit card, you may qualify for an unsecured credit card with another credit card issuer after six to twelve months. That's assuming your secured credit card has reported your credit history to one of the major credit bureaus.
A secured card is a good choice if you are just starting out with credit or you need to repair damaged credit history and you can't get approved for a regular credit card.