What is a secured credit card?

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Summary

• A secured credit card typically uses  your own money as a deposit to set your credit limit, and which you usually get back. 

• It’s ideal to use it for small, planned purchases and pay your statement by the due date. The grace period, which is the time between your statement date and due date, lets you avoid interest on new purchases when you pay in full.

• On-time payments and low revolving credit utilization, which is how much of your limit you use, may help you build credit over time. Results vary based on your credit profile and the credit scoring model your lender uses.

• Look for a card that reports to all three credit bureaus—Equifax, Experian, TransUnion—and has low fees. 

• A secured card may be a good fit if you’re new to building a credit history or working towards improving your credit. It’s likely not a good choice if you anticipate needing the deposit money for other bills in the near future.

• Keep it simple: Turn on autopay, add due date alerts to your calendar, try and keep your credit utilization low, and review your credit card statements each month.

If you’re building credit for the first time or have poor credit and working to improve it, you might feel stuck. A secured credit card may be a practical way to start rebuilding (or establishing) your credit history. It works by using a refundable deposit as collateral and helps you establish a record of on-time payments.

Here’s an example of how it can work: You make a cash deposit from your banking account to request your credit limit. If approved, you use the card for small purchases, and you pay your balance on time. Over time, that steady pattern of on-time payments can help you build confidence and a stronger credit profile as long as those payments are reported to the three nationwide credit reporting agencies depending on factors like payment history, existing debt, and the scoring model used.

What is a secured credit card?

A secured credit card is a credit card that typically uses a refundable security deposit of your own money to set your credit limit and open the account.

For example, if you deposit $300, your requested credit limit is usually $300. Then, you can use the card anywhere the network is accepted up to that $300. Similar to typical credit cards you might be familiar with, you’ll get a statement each month and a due date to pay. 

How secured credit card can work

1. You apply for the card. The issuer may check your credit with a hard inquiry, which is a lender’s review of your credit for an application.

2. You make a security deposit or other cash deposit. This is usually your starting credit limit. Many companies require you to have a linked bank or deposit account to do this.

3. You use the card for small, planned purchases.

4. You pay your statement by the due date. If you pay the full statement balance, you can avoid interest on new purchases during the grace period. A grace period is the time between your statement date and your due date.

5. Many issuers report your on-time payments to the credit bureaus. Credit bureaus are companies that keep credit files used to create credit reports and credit scores.

If you manage the card well, and depending on the card agreement, the issuer may return your deposit when you close the account or when you upgrade to an unsecured card. An unsecured card doesn’t require a deposit and typically has a higher credit limit than a secured card.

Who a secured card may be best for

A secured card can be a good fit if you’re new to credit and want a simple way to show a history of on-time payments. It can also help if you’re rebuilding your credit after missed payments or a short credit history and thin credit file. You usually don’t need a high score to get started, and the deposit keeps spending in a safe range while you build habits.

Who a secured card may not be good for

If you already have strong credit and qualify for a low-rate unsecured card with rewards, for example, a secured card may offer fewer benefits than you might want. If fees are high or the issuer doesn’t report to all three major credit bureaus, the value may be limited.

Ways to use a secured card to build credit

1. Keep spending small and planned. Because your limit may be relatively low compared to unsecured credit cards, aim for regular, easy-to-pay purchases like a streaming bill or groceries.

2. Pay on time every month. Consider setting  up autopay for at least the minimum payment due. Add reminders a few days before the due date.

3. Pay the full statement balance when you can. That helps you avoid interest on purchases during the grace period, subject to the credit card’s terms.

4. Keep your credit utilization low. Credit utilization is the share of your limit you’re using. Many people aim to stay below 30%. The lower the percentage the better.

5. Check your statements. Make sure charges and payments on your credit card statement look correct. If they don’t, fix the issues as soon as you can. If something looks off, report it to your card issuer as soon as you notice.

Secured card vs. unsecured card

Both secured and unsecured credit cards let you borrow up to a limit and pay later. The difference, however, is that a secured card requires an upfront deposit of your own money. An unsecured credit card does not—your approval usually depends more on your past credit history and income. 

With either card, on-time payments and low credit card balances can help your credit improve over time.

5 common fees and costs

• Annual fee: Some secured cards charge a yearly fee.

• Interest on purchases: This is listed as annual percentage rate (APR), which is the yearly cost to borrow. You may be able to avoid purchase interest if you pay your full statement balance by the due date.

• Cash advance fees: Taking cash from your card, if your card offers cash advances, often comes with high fees and a separate, typically higher APR that starts right away. 

• Foreign transaction fee: Some cards charge extra on non-U.S. retail purchases or when traveling abroad.

• Other fees: These may include late or failed payment fees if your payment is unable to be processed. It’s always a good idea to thoroughly review the card terms before applying for any credit card.

How to choose a secured card

• Look for a secured card that reports your payments to all three major credit bureaus—Equifax, Experian, and TransUnion. That way, your on-time payments show up across your full credit history.

• Look at the total cost, not just the perks. Add up the annual fee (if any), deposit amount, and other potential charges, then decide if the card’s benefits are worth the overall cost.

• Confirm the deposit rules. Know the minimum and maximum deposit required and how/if it will be returned to you.

• Review upgrade options. You can see if you can move to an unsecured card after a period of on-time payments.

• Make sure the card’s app and alerts fit your routine. Easy tools help you stay consistent.

How your credit card use can impact your credit score

Your credit score is a number that estimates how likely you are to pay on time. On-time payments factor strongly in many credit scoring models. Low revolving credit utilization also helps. New accounts and hard credit inquiries can move your score down a bit at first. Over time, however, steady on-time payments can support progress.

How to move from a secured to unsecured card

Try using your secured card for several months with on-time payments, while keeping a low balance. Then you can ask your card issuer if you can upgrade to an unsecured card. If they approve, they may return your deposit and offer you an unsecured card. If not, you can keep building and check again later. You can also compare offers from other issuers when you’re ready.