If your credit isn’t in great shape, you’re familiar with the downsides of a bad credit score. Some are the obvious, such as difficulty qualifying for loans. Some are less obvious, such as trouble securing an apartment lease and higher auto and home insurance premiums in certain states. These consequences can seriously impact your finances and quality of life.
Fortunately, digging yourself out of a credit hole isn’t rocket science. It just takes time and the right tools.
One such credit-building tool is a secured credit card. A secured credit card can build your credit, boost your credit score, and unlock financial opportunities that were previously out of reach. But you have to use it responsibly — which means you first need to know what it is and how it works.
What Is a Secured Credit Card?
A secured credit card is a credit card that requires a security deposit when you open your account. You must make the deposit before you can make any purchases on the card, and it stays with the issuer until you close your account.
Secured credit cards often accept applicants with poor credit or no credit scores at all. This makes them good for building or rebuilding credit. If you use your card responsibly, it’s likely (but not guaranteed) that your credit score will improve.
Most people only use secured credit cards until they can qualify for an unsecured card. That’s why it’s so important to use your card responsibly — and to wait to apply for a secured card until you’re sure you’re ready for a credit card of your own.
How Secured Credit Cards Work
To understand how secured credit cards work, you need to understand their most important features. These include their security deposits, credit limits (and how they relate to security deposits), and how they affect your credit.
Security Deposits Held in Collateral Accounts
Secured credit cards are secured by a cash deposit held in a collateral account, usually an FDIC-insured savings account with a low yield or none at all.
Once your secured credit card application is approved, you’re required to make your security deposit before you can begin using your card. The minimum deposit amount usually ranges from $200 to $500. A few cards, like Capital One Secured Mastercard, allow deposits as low as $49.
Maximum deposits vary by card, but balances in excess of $10,000 are rare. You can get your security deposit back when you close your account and pay off any outstanding balance or when you upgrade to an unsecured card with the same issuer.
Credit Limits Tied Closely to Security Deposits
Secured credit cards’ initial credit limits are usually identical to the initial security deposit amount. Deposit $500 into your security account, get a $500 credit limit, and so on.
Some secured cards for people with very bad credit wall off part of the deposit. So if you deposit $500 into your security account, you might get a credit limit of just $250 to start.
Many issuers allow cardholders in good standing to raise their credit limits with additional collateral account deposits. If yours does, you probably won’t need to formally apply for the credit limit increase.
Balance Payments
Like unsecured credit cards, secured cards require regular balance payments on a monthly schedule. You make these monthly payments with cash on hand, not your security deposit. Your deposit remains locked up except in specific circumstances outlined below.
Credit Bureau Reporting
Secured credit card issuers generally report credit utilization and payment patterns to the three major credit bureaus: Experian, Equifax, and TransUnion.
Before applying, review your cardholder agreement and disclosures to confirm that the issuer does report account activity, and to which credit bureaus. If your issuer does report, responsible use and timely payments can raise your credit score over time.
Higher APRs
With some notable exceptions, secured credit cards generally have higher APR ranges than unsecured credit cards. Regular APRs above 20% are common, even in low-interest-rate environments.
To make matters worse, low APR introductory promotions are nonexistent in the secured credit card world. Secured credit cards issued by credit unions tend to have lower APRs, but those cards generally require credit union membership. They may not be available to the general public.
Annual Fees
Most secured credit cards carry annual fees, but not all. When present, these fees are usually modest by premium credit card standards: $25 to $50 is a typical range.
The few secured cards that don’t charge annual fees typically have stricter underwriting requirements. They require decent credit, solid income, or both. They’re therefore out of reach of many ideal secured credit card users.
Getting Your Security Deposit Back (Or Losing It)
Your security deposit stays in your collateral account until one of three things happens:
- Your credit card account becomes seriously delinquent and the issuer seizes the security deposit to cover your unpaid balance.
- You pay off the card’s balance in full and close the account, in which case you get your security deposit back with interest (if applicable).
- You upgrade to an unsecured credit card with the issuer’s approval and get your deposit back.
Secured vs. Unsecured Credit Cards
Secured credit cards have some things in common with unsecured credit cards, such as interest charges on unpaid balances and regular credit bureau reporting.
But they also have some important differences, such as a credit limit that’s closely tied to your security deposit. These are some of the biggest distinctions.
Security Deposit
The biggest difference between secured and unsecured credit cards is the refundable security deposit. Secured credit cards require one; unsecured cards don’t.
If you’d do anything to avoid putting down an initial deposit, you need to find an unsecured credit card for people with bad credit or consider ways to build credit without a credit card.
Underwriting Standards (How Easy It Is to Qualify)
Most secured credit cards have looser underwriting standards than most unsecured cards. People with bad credit or limited credit can often qualify for a secured credit card even after being turned down for an unsecured credit card.
Each secured credit card is a little different. But some secured cards accept applicants with FICO scores between 500 and 580, which is far below what credit card companies consider a good credit score.
Some secured credit cards don’t require credit checks at all. You can qualify for these cards without a FICO score or with a terrible credit score.
Credit Limits
Secured credit cards tend to have lower credit limits than unsecured credit cards. Most secured credit cards start with credit limits of $200 or $300, and limits top out at $3,000 to $5,000 even for well-qualified cardholders. In contrast, you can get an unsecured card with a credit limit above $10,000 if your income is high enough.
As with underwriting, there’s some overlap between the two. Many entry-level unsecured cards start with credit lines of just a few hundred dollars.
Rewards Programs
Some secured credit cards earn cash-back rewards, but most don’t. Unsecured credit cards are more likely to be rewards credit cards, although not all are. And when secured cards do earn rewards, they tend to be less generous about it, capping cash back at 1% or at most 2% of eligible purchases.
Credit Card Perks and Benefits
Valuable perks and benefits, such as travel credits and freebies, are more common with unsecured credit cards. Secured credit cards tend to have basic benefits backed by Visa or Mastercard, but they don’t go above and beyond.
Pros & Cons of a Secured Credit Card
Is a secured credit card right for you? Consider these upsides and downsides before you apply.
Pros of a Secured Credit Card
Secured credit cards’ benefits include relaxed underwriting, the opportunity to improve your credit and qualify for an unsecured card, and natural brakes on overspending.
- You Don’t Need Good Credit to Qualify. You don’t need good credit to qualify for a secured credit card. That’s kind of the whole point. A secured credit card is your best bet — maybe only bet — if you have impaired credit or not much of a credit history.
- Can Improve Your Credit Score Over Time. Most secured credit card issuers report users’ credit utilization and payment patterns to the three major credit reporting bureaus. If you use your card responsibly, this regular reporting could raise your credit score and put you in position to qualify for an unsecured credit card in a year or two.
- Deposits May Earn Interest. This shouldn’t be your only reason to apply for a secured credit card, but it’s a nice bonus. Depending on the card, your deposit could earn interest on par with the top high-yield savings accounts.
- May Offer a Clear Path to Unsecured Status. Many secured credit cards give users a clear path to upgrade to unsecured cards in as little as six to nine months. You do have to use your card responsibly in the meantime though.
- May Discourage Overspending. Although your secured credit card’s low spending limit can be a drawback when you need to make a big purchase, the flip side is that it puts a hard cap on credit card spending. When you can’t overspend your security deposit, you can’t get (too) deeply into debt.
- May Earn Rewards on Spending. The best secured credit cards earn rewards, most often cash-back or travel points at modest rates. These rewards won’t make you rich, but like interest on deposits, they’re a nice bonus.
Cons of a Secured Credit Card
Although a secured credit card is often better than no credit card at all, it does have some downsides.
You’ll pay more if you carry a balance and might not be able to avoid an annual fee, for starters. And don’t expect to get your security deposit back until you close your account and pay off your balance.
- Potential for Higher Interest Rates and Fees. Most secured credit cards have regular APRs above 20%, compared with 15% or so for premium unsecured credit cards. Many charge annual fees as well. You can avoid interest by paying off your balance in full, but there’s usually no way to avoid the annual fee.
- Can Hurt Your Credit As Well As Help It. A secured credit card only helps your credit score if you use it responsibly. If you miss payments or max out your credit utilization, it could do more harm than good. So be honest with yourself about whether you’re ready for any credit card at all.
- Locks Up Your Security Deposit. When you make your initial security deposit, you’re kissing it goodbye until you close your account or graduate to an unsecured card. If you think you’ll need the money before then, think twice about applying for your credit card.
- Relatively Low Spending Limit. Secured card credit limits are more likely to be measured in the hundreds of dollars, not thousands, at least to start.
- Often Requires Some Credit History. A few secured credit cards don’t require a credit check and accept applications from people without FICO credit scores. But most do ask that you have a record of credit use, however spotty. Expect your options to be limited if you’re new to credit — you may need to settle for a special credit-builder card or loan.
Is a Secured Credit Card Worth It?
A secured credit card is worth it if you have poor credit or limited credit and would have trouble qualifying for an unsecured credit card.
If you have decent credit and income, you’re more likely to qualify for an entry-level unsecured credit card. And if you can qualify for an unsecured credit card, that’s usually the better choice.
Remember that just because you can get a secured credit card doesn’t mean you should. Before applying, take an honest look at your spending patterns and ask yourself whether you’re ready for any credit card at all. If you have trouble spending less than you earn and keeping to a budget, consider waiting and working on building better financial habits first.
Secured Credit Card FAQs
A credit line of any size is a big responsibility. Before you apply for a new secured credit card, know what you’re getting into — and how to make sure your new card is a help, not a burden. Brush up by reviewing the answers to these common questions about secured credit cards.
Do I Get My Security Deposit Back?
Yes, if you use your credit card responsibly, make timely payments, and have a zero balance when you close the account.
If you miss multiple payment deadlines while your card is open, your issuer could seize the security deposit. And if that happens, you won’t get it back.
What Credit Score Do You Need for a Secured Credit Card?
It depends on the credit card and issuer. You can qualify for some secured credit cards even if you have bad credit — a FICO score below 580.
Pickier secured credit cards require fair credit, typically in the 620 to 660 range. Above that, you’re in unsecured credit card territory.
Remember that not all secured credit cards require credit checks when you apply. If yours doesn’t, your credit score might not matter.
How Fast Do Secured Credit Cards Help You Build Credit?
It depends on your current credit situation and whether you can demonstrate consistent, responsible credit use.
Some secured credit cards offer a path to unsecured status in as little as six to nine months. But if your credit is really impaired or you don’t have a credit score, it can take longer to qualify for an unsecured card — maybe 12 to 24 months.
What Are the Best Secured Credit Cards?
The best secured credit cards include:
- The Secured Sable ONE Credit Card, which earns up to 2% cash back on eligible purchases
- The Capital One Platinum Secured Credit Card, one of the few secured credit cards where your spending limit may be higher than your security deposit
- The OpenSky Secured Visa Credit Card, which doesn’t require a credit check when you apply
See our list of the best secured credit cards for more ideas.
Is a Secured Credit Card Bad?
Not at all! For many consumers, a secured credit card is a crucial first step on the road to better credit. If you’re recovering from bankruptcy or building your credit for the first time, you shouldn’t shy away from a secured credit card because you’re worried about what others might think.
Final Word
At one of the first jobs I ever held, an outbound call center gig, my new supervisor closed the group orientation session with a matter-of-fact prediction: “In three years, none of you will be here.”
The remark was ominous, sure, but refreshingly realistic too. He was just stating the obvious: “You shouldn’t want to work at an entry-level job paying just north of minimum wage for any longer than you have to. Move up, or we’ll help you move out.”
Like entry-level jobs, secured credit cards are a means to an end. They serve a vital purpose for credit-building consumers who can’t yet qualify for unsecured credit cards. Used responsibly, they serve as a bridge to credit cards with more attractive rates and terms, not to mention home loans and other vital types of credit — just as starter jobs lift hardworking young people up to more meaningful work.
But, like the jobs in which most of us started, secured credit cards aren’t built for the long haul. Why hold onto the same secured credit card for five years when you can slowly but surely improve your credit with responsible use and graduate to an unsecured alternative in 12 or 24 months?
Keep building. Greener pastures await.
