Secured credit cards

Here’s how secured credit cards work

A secured credit card is designed to help you build your credit score and works similarly to a traditional credit card. The main difference is you need to put down a security deposit before you can open a secured card.

The deposit helps protect the issuer in the event you fall behind on your payments or default. It allows the bank to extend credit to you when you otherwise wouldn’t qualify for a credit card. This gives you the opportunity to build your credit by showing you can responsibly manage a credit card.

These are the three basix steps for how secured credit cards work.

1. Compare and apply for a card. Browse all secured credit cards and choose the one that seems most appealing. You may have to provide your bank credentials during the application to pay the deposit.
2. Raise your credit score. Now that you have a card, use it to raise your credit score by paying your full balance on time each month.
3. Graduate to an unsecured card. Once you raise your credit score, you’re ready for a new card. Contact the bank to see if you can upgrade your card and get your deposit refunded.

What should I look for in a secured credit card?

When researching what card will best fit your needs, there are a few main factors to take into consideration:

• How much do you have to deposit?
• What’s the annual fee?
• How high is the APR?
• Is there a grace period for interest payments?
• What are the fees?
• Is your payment history reported to the three major credit bureaus?

A provider’s website should clearly list a card’s deposit, annual fee and APR. When you’re confident you understand all of the card’s details, it’s time to submit an application.

Using a secured card effectively

Here’s how to use a secured card to effectively build your credit:

• Pay your balance on time. And pay it in full. This is the best way to build your credit and potentially graduate to an unsecured card.
• Don’t max out your credit limit. The chances are you’ll get the minimum credit line of around $300. Maxing out your credit limit could send the wrong signal to other lenders. The recommended utilization ratio for credit-building is less than 30%, but in this case, you can safely go to 50% as long as you always pay off your balance in full before the due date.
• Put your subscription services on the card. Get your Netflix account or any similar service and automate your payments so you always use your card and always pay off your balance.

Who are secured credit cards good for?

A secured credit card can be a useful financial product for a handful of different people in different situations, whether they need to build credit or learn how to use a credit card responsibly. Here are a few situations where you might benefit from a secured card:

• First-time credit card user. A secured card in this case can be useful for numerous reasons. Using it will help you build credit, learn smart spending habits and teach yourself how to responsibly manage an account with your own money.
• Bankrupt. The best way to combat being denied after declaring bankruptcy is to apply for a secured credit card with no credit check.
• Student. A secured card can be useful for a student as it can teach responsible spending habits and has a limited balance.
• Poor credit. A great way to rebuild your credit is to use a secured credit card and make on-time payments and clear your balance each month. Learn more about how to determine your credit score.
• Building credit. If you have minimal credit history, a secured credit card can put you in a good position to start pushing your credit score up the hill.
• Identity theft. While this may not be your fault, traditional lenders may be unwilling to lend to you. In this case, apply for a secured credit card with no credit check and monitor your account frequently.

Five ways secured credit cards rebuild your credit

1. Secured cards are a quick first step. These cards typically don’t require credit checks, and you won’t be subject to a soft or hard inquiry. You’ll likely be green-lighted for a card unless you’ve recently claimed bankruptcy or you have a history of frequently missing payments.
2. Most secured cards report to credit bureaus. When bureaus see you’re responsibly using your credit card, they’ll reward you with higher credit scores. Be sure to confirm with your lender that your spending and payment history will be reported, otherwise the card will do nothing for your credit history.
3. They lower your credit utilization ratio. After you’re approved for a secured credit card, your credit utilization ratio should go down. Credit utilization is so important that it makes up 30% of your credit score. Credit bureaus want to see you have a lot of available credit relative to your card balances.
4. They increase your total number of credit accounts. Just like your utilization ratio affects your credit score, so does your total number of open credit accounts. Credit bureaus generally like seeing more accounts because it indicates that more lenders find you creditworthy.
5. Secured cards help you build better financial habits. When you open a secured card, you put down a security deposit that’s equal to your credit limit. That means you can control the amount you deposit, thus setting your credit limit on your own terms. After you build your financial habits, you’ll be ready to obtain unsecured cards with higher credit limits.

Secured cards pros and cons

Because secured cards are designed for building credit, there are some trade-offs to consider.

Do secured cards come with rewards?

You may have heard of reward credit cards — cards that offer bonuses for spending.

For example, a cashback card gives you a portion of your spending back to you. If your card offers 2% cash back on all purchases, spending $10,000 means you get $200 back.

A travel card, meanwhile, offers points or miles based on your spending. Maybe your card offers 2 points per dollar you spend at restaurants. If you spend $5,000 on dining, then, you’ll earn 10,000 points. You can later redeem these points for hotels, flights, car rentals, cruises and more.

Rewards for unsecured and secured cards: It’s lopsided

Here’s the thing about rewards: You’ll almost always find them with unsecured cards.

Secured cards with rewards do exist, but they’re rare. Lenders largely offer rewards to attract consumers with good credit. In the secured-card space, they offer few bonuses.

If a card comes with rewards, check if your points or miles might be diminished by an annual fee. To decide if the annual fee is worth paying, calculate how many points or miles you need to earn to break even. Then find how much you must spend to obtain them.

Secured credit cards vs. unsecured credit cards

The primary difference between a secured card and an unsecured card is that a secured credit card requires a security deposit. This security deposit can range from $50 to more than $200 and acts as collateral for the issuer (and sometimes acts as your maximum credit limit).

It’s a sort of guarantee that if you go belly up on your payments and your account is closed, the issuer is covered for losses. And don’t worry: assuming you used your secured card responsibly, you’ll get your deposit back after you close your account.

Otherwise, secured credit cards are nearly identical to unsecured credit cards in how they function, including how they affect your credit score. Just know that a secured card will typically have a lower credit limit and higher APR than an unsecured card.

Secured credit cards vs. prepaid cards

Secured credit cards and prepaid cards may look similar, but they have notable differences. Here’s a quick rundown of a few of the main features that separate the two:

When are secured cards better than prepaid debit cards?

Secured credit cards allow you to use the lender’s money on credit with the promise to pay it back later. The greatest advantage secured cards have over prepaid cards is that it helps you build your credit score as you use it.

Secured credit cards also offer more flexibility in your spending, and some offer rewards programs, benefits and other perks that aren’t available on prepaid debit cards.

Which banks offer secured credit cards?

What type of card do you need?

No Annual Fee

Low Deposit

No Credit Check

Ask the experts

• Andrei Simonov
• Chairperson of the Department of Finance
• Michigan State University

How effective are secured cards at helping consumers build their credit?

They are quite effective. In most cases, for clients with limited or no credit history at all, it is a great option to build their FICO score. In particular, secured credit cards are popular among recent immigrants. The advantage of a secured credit card is exactly the fact that it helps you to create a positive credit history. The disadvantage is cost. Those cards tend to be expensive, and many carry annual fees and high-interest rates.

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• Travis Davidson
• Associate Professor of Finance
• Ohio University

What should a consumer do for their credit if they get denied a secured card?

If the goal of initially applying for a secured credit is to obtain credit (i.e. borrow money), then a consumer should apply for credit elsewhere (other credit cards, store cards, banks, etc.). However, if the consumer’s goal is to improve their credit, then I believe a mental shift is necessary. A person denied a secured card likely has a bad credit history, which is often caused by making late payments or missing payments completely. Dedicating oneself to paying bills on time – always and forever – might be the best way to improve credit enough to obtain a loan in the future.

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• Daniel Folkinshteyn
• Associate Professor
• Rowan University

When is a secured credit card a good idea?
A secured credit card is a good option when one doesn’t have a good enough credit history to qualify for a regular credit card. You have to make an initial collateral deposit which serves as your credit line, and still have to pay it off every month to avoid getting charged interest and or late fees. It is important to look at the card’s terms and conditions to ensure they don’t charge egregious fees. There are many competitive secured credit card offers so you should shop around to get the best deal. An alternative is to just use a debit card attached to your checking account, though that would not help you build your credit score.

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• Neel Das
• Associate Professor
• Appalachian State University

Can secured credit cards really help consumers raise their credit?
It could be assumed that a likely correlation exists between secured credit card usage and improved creditworthiness. But to assert such with conviction would be tenuous because other factors also play a role.

The main thing that people new to credit or attempting to repair bad credit should consider is using secured credit cards. While solely relying on such a card may not be the optimum tactic, this could be a move in the right direction to help consumers improve or raise their credit.

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• Al Kamienski
• PhD Professor of Finance
• North Park University

Can spending more money help consumers build their credit score faster?
If a borrower hopes to increase their credit score quickly it is generally not advisable to quickly spend more money using a credit card. Financial institutions monitor ratios including total balance outstanding divided by the total credit available. If this percent indebtedness grows too quickly a financial institution may flag the account and accelerate risk management. Lenders don’t like uncertainty and are more comfortable with predictable behavior. One best practice for increasing a credit score quickly is to become more predictable by spending around 25% of a credit limit monthly and then paying off the balance in full at the end of every billing cycle. This demonstrates a history of on-time payments, credit avoids interest costs, and provides historical behaviors can increase a credit score and give confidence to future lenders.

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• Julio Sevilla
• Assistant Professor in the Terry College of Business
• University of Georgia

How do secured credit cards help consumers build their credit score?
The key is access to credit. People with new or damaged credit scores struggle to get approved for some favorable credit products, which prevents them from building or rehabilitating their credit score. The main reason why they’re denied is the high risk of default creditors can sense. By securing their credit cards, this risk disappears or diminishes and the consumer now has an opportunity to have credit and build it through time with a positive and consistent track record. I would recommend consumers that have limited access to credit to cautiously consider these options.

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Tips to save money on your secured credit card deposit

Your plan to get a secured credit card must involve a saving strategy that begins with knowing your fixed expenses. Developing new spending habits can yield a lot of savings, but a little assertiveness won’t hurt either.

1. Download a free budgeting app. Set financial goals, track your spending, view your credit score, keep tabs on your investments and balances, pay bills and receive alerts.
2. Download a free mobile banking app. Some mobile banking app work by moving money from your checking account to a separate account when your transactions trigger preset rules.
3. Look into low-income assistance. Many communities offer low-income assistance programs for gas, electricity and other utilities. Also, if you initially put down a deposit for your utility accounts, ask if you can have it refunded after about a year of timely payments.
4. Get programmable thermostats and energy-saving appliances. Install a programmable thermostat to lower home heating costs or seek out Energy Star–labeled appliances. Many utilities offer rebates that partly cover the installation cost.
5. Reexamine your phone bill. Examine your phone’s service plan, and talk to your provider about ways to bring down your cost. Consider a stepped-down pla or use a prepaid carrier or join a friend or family member’s plan can also reduce your monthly smartphone tab.
6. Ditch cable. Join the growing number of cord cutters by exploring whether streaming services can replace your cable bill. If you aren’t ready to ditch cable, call your provider to negotiate a cheaper deal.
7. Look into your transportation options. If you live far from work, consider asking your employer if telecommuting is possible to save on gas costs. Evaluate public transportation, particularly if you live in or near an urban center where trains, buses, carpooling and carshare services, are available. If you do drive, apps like GasBuddy and Gas Guru can steer you to the best gas deals along your route.

What if my application for a secured credit card was denied?

The first course of action to take once you’ve been denied for a secured credit card is to identify the reason why you’ve been denied. Do this by contacting the lender directly and asking for answers. There may be inaccurate information on your credit report — if this is the case, contact the credit bureaus to dispute the misinformation.

You could also consider applying for a secured credit card at a credit union or with a lender that doesn’t conduct a credit check. Another option is to become an authorized usermore info button on someone else’s credit card account.

When can I ask for an upgrade to an unsecured card?

Secured credit cards can be used just like any other credit cards, often with the goal of graduating to an unsecured card.

If your provider doesn’t contact you with the opportunity to upgrade, call them after about a year of responsible payments to ask about trading up to an unsecured card. At that time, you can also ask about a refund on your deposit.

Plan to use your card for small purchases that you can pay off each month. Remember that payment history is 35% of your credit score, making it the largest single item factored into your credit score.

Bottom line

Secured cards are a useful tool for building or rebuilding your credit score and moving on to an unsecured card. Your main goal is to spend responsibly, pay your balance on time and graduate to more beneficial credit cards as soon as possible.