What is a Secured Credit Card?
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A secured credit card requires you to put down a security deposit in order to get it. This deposit serves as part or all of your credit limit. For instance, if you’re required to put down a $500 security deposit, your credit limit will likely be $500. However, after several months of paying your monthly credit card balance on time, your credit card company may increase your credit limit without requiring a higher security deposit.
You’re still expected to pay your credit card bill each month. Your security deposit doesn’t go toward making payments. Rather, it serves as a protection for the credit card company if you don’t pay your bill.
In many cases, this security deposit is refundable if you continue to use your card responsibly. Often, this is returned as a statement credit. You may also get your security deposit back if you close your account and pay any balance due in full. However, it’s important to read the specific rules for each secured credit card because this isn’t always guaranteed.
Secured vs. Unsecured Credit Cards
Secured and unsecured credit cards are very similar in the way they work. You can use them to make everyday purchases and are expected to pay at least the minimum balance each month.
The major difference between these two types of cards is that unsecured credit cards don’t require cardholders to put down a security deposit, whereas a secured card does. Instead, approval for unsecured credit cards is based on credit scores and income.
Most consumers prefer unsecured credit cards. However, if your credit score or income isn’t high enough to get one, a secured credit card can be a great alternative. In fact, when used responsibly, a secured credit card may help you build your credit.
Who Are Secured Credit Cards for?
Secured credit cards may be a great option for various types of consumers, including:
- Those having trouble getting unsecured credit cards
- Those with limited credit histories looking for ways to build their credit
- Those with bad credit who want to take steps to repair their credit score
Keep in mind that it’s still possible to be turned down for a secured credit card, particularly if you have a blemish like bankruptcy on your credit history.
How Secured Cards Help You Build Credit
Credit scoring models, such as FICO® and VantageScore®, use information from your credit report to calculate your creditworthiness. While each credit scoring model has its own way of calculating credit scores, factors such as payment history, credit utilization, credit mix, and credit history often play a major role.
Obtaining a credit card, even a secured credit card, can help in several ways. First, by making on-time payments each month, you can slowly start to rebuild your credit. Secondly, credit cards are a type of revolving debt that’s different from car loans or mortgages, which are installment loans. Depending on your specific situation, obtaining a secured credit card can help build your credit mix.
The best way to build your credit with a secured card is to use the card responsibly and make your monthly payments on time every time. Keep in mind that even though you put down a security deposit, you’re still expected to pay your balance due each month. That way, you’ll build a positive payment history on your credit.
There are other ways to use your card to build your credit, too. The credit bureaus look at your credit utilization as a factor in your credit score. This represents the amount of debt you owe compared to the amount of credit you have available.
It’s recommended to keep your balance below 30% when possible. For example, if you’re approved for a $500 secured credit card, it’s best to keep your balance due under $150 if possible.
It’s important to note that applying for too many credit cards within a short period of time can hurt your score. Each application puts a hard inquiry on your credit report. So, find one card and apply, and only apply for another if you’re declined.
Tips for Using a Secured Card Wisely
Getting a secured card is only the first step to building good credit. Now that you have one, you must be sure to use it responsibly. Since the money isn’t coming directly out of your bank account, it can be easy to overspend if you’re not careful.
Start by setting a budget. Know exactly how much you can spend each month and comfortably pay off when the bill comes due—otherwise, you might be tempted to spend money on things you don’t really need. This type of impulse buying can be dangerous and put you in a difficult financial position.
On the other hand, you don’t want to hide your card away and never use it. This approach will limit the impact having a credit card can have on your overall credit score. Your payment history accounts for up to 35% of your FICO credit score. However, if you never make purchases using your credit card, you’ll never get credit for making on-time payments.
Is There a Downside to Secured Cards?
Unfortunately, there are some downsides to having a secured credit card. First, you need to have the money available to use as a security deposit. Despite this security deposit, you must still pay off the balance. Additionally, you may need to wait months or years to get your security deposit refunded, if ever.
Secondly, secured credit cards tend to have higher interest rates than standard cards. Some secured credit cards also charge an annual fee. Finally, these cards typically don’t come with added perks, such as cashback rewards. But if you use it right and do build your credit, you’ll be on your way to qualifying for a rewards credit card before you know it.
These factors make it vital to compare your options. Be sure to understand the advantages of each card. For example, the Capital One Platinum Secured Credit Card has card options with a minimum deposit of $49. While the card also boasts no annual fees, interest rates are slightly higher than some secured credit cards.
See Rates and Fees for Capital One Platinum Secured Credit Card
On the other hand, the Capital One Quicksilver Secured Cash Rewards Credit Card offers 1.5% cash back on every purchase with a potential credit limit increase in as little as six months. However, this option also comes with higher APRs.
See Rates and Fees for Capital One Quicksilver Secured Cash Rewards Credit Card
Parting Thoughts on Secured Credit Cards
Now that you know the answer to the question, “What is a secured credit card?” you can better determine if getting one is the right option for you. As long as you use the new credit card wisely without overspending, it can help improve your credit over time.
Before making this decision, it’s better to get a clear picture of your current financial state. Credit.com’s Free Credit Score gives you access to your current Vantage 3.0 credit score and updates it every 14 days. If you’re looking for other ways to build your credit, Credit.com’s ExtraCredit® program has tools to help you work on your credit goals.
Advertiser Disclosure: Credit.com has partnered with CardRatings for our coverage of credit card products. Credit.com and CardRatings may receive a commission from card issuers.