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How do secured credit cards work?

Credit-building cards can work for you in a few ways.

Having a good credit history is paramount when it comes to larger commitments like renting an apartment, leasing a car or taking out a mortgage for a new home. However, building credit can be difficult for those without the credit score necessary to obtain a credit card – or any type of credit – in the first place. In this event, a secured credit card offers an accessible path to build better credit. In time, you’ll qualify for the unsecured credit card that you actually want.

What types of credit cards are out there?

Secured credit cards are just one of several types of credit cards available, though the exact number of credit card types depends on how you want to categorize them. For example, secured and unsecured credit cards are the two primary types of credit cards, though other types of credit cards might include cash back, travel or rewards cards.

No matter the type of credit card, if you neglect to pay your bills, your credit score is negatively affected and your outstanding balance may be sent to a collection agency. Since most unsecured credit cards require a decent credit score of 650 or higher, approval is hard for those just starting to build credit – or for those who have a shaky history and a score between 300-600.

How do secured credit cards work?

In practice, secured credit cards work much like unsecured cards: You build your credit score by making purchases and paying your balance on time each month. However, when it comes to secured cards, there are a few important differences:

  • They require a security deposit. Secured credit card providers reduce risk by requiring a security deposit before you can open your account. This serves as “collateral” that your lender can collect if you default on your payments.
  • You can set your credit limit. When you open a secured card, the money you deposit as collateral — usually between $200 and $10,000 — often becomes your monthly credit limit. This means you can choose if you have a lower or higher credit limit. After a few months of on-time payments, you may be eligible to increase your limit.
  • They’re designed to help. Most secured cards report your activity to the two major credit bureaus: Equifax and TransUnion. Many secured cards also offer monthly credit score checks so you can track your progress. Providers occasionally offer educational tools as well to help you get back on track.
  • They offer fewer features and poorer terms. Unlike unsecured cards, secured cards rarely offer additional perks such as cash back, rewards points or travel insurance. What’s more, interest rates and other fees on secured cards can be high.
  • In time, you can graduate to an unsecured card. Using your card regularly and responsibly can help your credit score increase. Providers tend to see 650 as the “magic number”, which, once you’ve reached or surpassed this number, may open you up to the world of unsecured credit cards. Some secured card providers offer an opportunity to graduate to an unsecured version of the card – provided you show financial responsibility over a certain period of time.

Compare secured credit cards

Name Product Required Deposit Purchase Interest Rate Cash Advance Rate Annual Fee Reward
Refresh Financial Secured Card
$200 - $10,000
17.99%
N/A
$12.95
The Refresh Secured Card has no credit check, a low annual fee and guaranteed approval once you secure your card with anywhere from $200 - $10,000.
Take advantage of a low annual fee, with no credit check and guaranteed approval once you secure your card with some funds.
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Who benefits from secured credit cards?

Secured credit cards benefit:

  • Those looking to rebuild a poor credit score.
  • Those with no prior credit history whatsoever.
  • Students or young adults who are ineligible for a student credit card.
  • New immigrants who are ineligible for an unsecured card.
  • Those who have filed for bankruptcy.
  • Those who misused credit cards in the past and have a history of missed payments.

Even if you fall into one of these categories, it’s still possible to be denied for a secured credit card.

How can secured credit cards help improve your credit?

Like unsecured credit cards, you’ll improve your credit with secured cards by using the card responsibly, staying on top of your payments and paying your bills on time. Paying your balance in full will also contribute to a healthy credit score. The high APRs and other fees should also help discourage you from keeping a balance from month to month.

Once your credit score is high enough, you could be eligible for an unsecured card. This can help you build credit quicker, often with added benefits like signup bonuses, lower fees, complimentary insurance, cash back and rewards programs.

When are secured cards better than other options?

Secured credit cards are always secondary to unsecured credit cards when it comes to building and utilizing credit. As such, they should be one of your first fallback choices if you’re denied an unsecured credit card.

  • Personal loans offer money quickly, but often charge hundreds of dollars in interest over the course of your loan. However, secured cards give you quick access to cash and the opportunity to avoid interest altogether by paying your balance in full each month. Though you pay an initial security deposit to get your secured card, you usually get it back once you close the card and pay off the balance in full.
  • Prepaid cards are another option that require a deposit. However, prepaid cards don’t help you build credit at all, as your payment history and activity is not reported to the credit bureaus. Plus, these cards tend to come with lots of fees.

Tips for choosing the right secured credit card

To determine the best secured credit card for you, consider what you’ll be using the card for and how it could benefit you. Here are a few factors to keep in mind when choosing a card:

  • Annual or maintenance fees. Most secured credit cards have an annual or monthly fee. Consider how much the card will cost you over the course of a year.
  • APR. The APR is an annual percentage rate, or the interest rate you’ll pay on your purchases if you don’t pay them off in full by the due date. Many secured cards have interest rates of 19.99% and higher, with many imposing a penalty APR for late or declined payments. Avoid paying APRs by spending only what you can afford and paying your balance in full each month by the due date.
  • Transaction fees. Transaction fees refer to things like balance transfers, cash advances, foreign transactions and late fees. If you plan on using these features, consider how the fee will affect you.
  • Pick the right provider. Some banks and credit card providers are better than others. Seemingly amazing cards can turn out to be a nightmare if the issuer is a hassle to deal with. Research the card providers and take into account customer reviews.
  • Rewards program. Secured cards rarely offer rewards programs. If you come across one, make sure it isn’t simply an effort to downplay other negative features like increased annual or monthly fees or a higher APR.
  • Authorized users. If you plan on letting a family member or significant other use your card, check with the lender to make sure this is allowed. Some lenders allow you to apply for an extra secured card at no additional cost, but others will charge a flat fee or require you to provide a higher security deposit.

What you need to know before you apply

Applying for a secured credit card is usually pretty straightforward. Before you apply, consider the following:

  • Your credit history. If you have poor or fair credit, approval is easier for secured cards than unsecured cards. You can usually find the recommended credit score for each card on its website. There are even some secured credit cards that don’t require a credit check, which could prove helpful if you have a particularly poor credit history.
  • Ways to apply. You can usually apply for a secured credit card online, by phone or through the mail. Online and phone applications are usually quicker, but many cards take applications by mail if you’re not in a rush. Some banks also offer secured credit cards, however, you usually have to inquire and apply in-person at a branch.
  • Timing. Approval depends on the provider and your application, with some lenders offering instant approval. However, some providers may need a little longer to assess your application, so don’t expect to hear back right away.
  • Credit inquiries. There are secured credit card providers that check your credit history and then there are ones that don’t. Some could make a soft inquiry on your credit history, but this doesn’t affect your credit score. Unsecured cards will do a hard pull, negatively affecting your credit score for a short period of time.

Why are credit inquiries important?

Multiple hard inquiries in a short time could lead lenders to consider you a high-risk customer. If you’re applying for multiple credit cards at once, it may suggest that you’re short on cash or preparing to rack up a lot of debt.

What you’ll need to apply

While it can vary between providers, you’ll typically need to provide the following information when you apply for a secured credit card:

  • Personal information. Full name, phone number, date of birth and Social Insurance Number (SIN).
  • Housing information. Address, type of residence, rented/owned, how long you’ve lived at your home and your monthly mortgage/rent payments.
  • Financial information. Banking information including assets and liabilities.
  • Income information. Employers name, your job position, length of employment and annual income.

What to watch out for

Secured credit cards are a solid option for building or rebuilding your credit score. However, they still carry the same risks associated with unsecured credit cards, including:

  • Annual fees. Most secured credit cards come with a fee, with some providers charging a monthly fee while others will charge the fee annually. Ideally, look to minimize the amount you pay towards annual fees in order to save money in the long run.
  • APRs. Many secured cards have APRs on the higher end, with rates typically sitting around 19.99%. If you plan on carrying a balance, look for a card with a lower APR. Be aware of introductory and penalty APRs which directly affect the interest rate you’ll pay on your purchases.
  • Transaction fees. Watch out for other fees such as foreign transaction fees and late penalties. Check the terms and conditions of your card in order to avoid being charged any unnecessary fees.
  • Unsatisfactory lenders. Despite decent card reviews, some providers have a poor reputation among customers. Complaints can range from communication issues to undisclosed and excruciatingly high fees. Consider what other users are saying before jumping into an agreement to avoid frustration with a potential lender.

Bottom line

If you’re looking for a credit card, but have poor or no credit history, a secured credit card could be a good fit for your financial needs. Remember to look out for high APRs and fees when comparing credit cards. In time, if you spend responsibly and pay your monthly bill in full, you’ll build your credit history and be able to graduate to a cheaper, more rewarding unsecured card.

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