What Is a Secured Credit Card?

Key features of secured credit cards explained

• Collateral requirement: Secured credit cards require a security deposit, usually $200 to $5,000, which becomes your credit limit
• Credit building tool: Helps establish or rebuild credit by reporting payment history to major credit bureaus
• Easier approval: More accessible for those with poor or no credit history compared to unsecured cards
• Transition potential: Many secured credit cards offer the opportunity to graduate to an unsecured card after 6-12 months of responsible use
• Higher fees: Often come with higher fees and interest rates compared to unsecured cards

How secured credit cards work

Application and approval process

• Applicants must meet basic underwriting criteria, though requirements are typically less stringent than for unsecured cards
• A credit check may be performed, but some secured credit cards don't require one

Using the secured credit card

• Functions like a regular credit card for purchases and building credit
• Credit limit is usually equal to the security deposit amount
• Cardholders should aim to keep utilization below 30% of the credit limit

Payment and credit reporting

• Monthly payments are required, just like unsecured cards
• Payment history is reported to at least one, preferably all three, major credit bureaus
• On-time payments are crucial for improving credit scores

Benefits of secured credit cards

• Credit score improvement: Can help increase credit scores by 24 points (median) over two years of responsible use
• Financial discipline: Encourages good credit habits through regular use and timely payments
• Path to better credit products: Can lead to qualifying for unsecured cards with better terms and rewards
• Savings accumulation: Some secured credit cards, like the Self Credit Builder Account, help build savings alongside credit

Potential drawbacks of secured credit cards

• Upfront cost: Requires an initial cash deposit
• Limited features: Often lack rewards programs and perks common in unsecured cards
• Possible credit score dip: Opening a new account may cause a temporary decrease in credit score due to a hard inquiry

Tips for maximizing credit building with secured credit cards

• Make on-time payments: Consistently pay at least the minimum amount due by the due date
• Keep utilization low: Aim to use less than 30% of your credit limit
• Use regularly: Make small purchases at least once per month to keep the account active
• Monitor credit score: Regularly check your credit score to track progress
• Consider graduation: After 6-12 months of responsible use, inquire about upgrading to an unsecured card

FAQ

What is a secured credit card?

A secured credit card is a type of credit card that requires a cash deposit as collateral, typically equal to the credit limit. It's designed for people with poor or no credit history to build credit by making regular purchases and on-time payments, which are reported to major credit bureaus.

How do secured credit cards work?

Secured credit cards work by requiring a security deposit, which becomes your credit limit. You can use the card for purchases like a regular credit card, and you're required to make monthly payments. Your payment history is reported to credit bureaus, helping you build credit with responsible use.

What are the main benefits of a secured credit card?

The main benefits of a secured credit card include: easier approval for those with poor or no credit, the ability to build or rebuild credit, potential to transition to an unsecured card after responsible use, and the opportunity to develop good financial habits.

How much deposit is required for a secured credit card?

The deposit required for a secured credit card typically ranges from $200 to $5,000, which usually becomes your credit limit. The exact amount can vary depending on the card issuer and your financial situation.

Can a secured credit card help improve my credit score?

Yes, a secured credit card can help improve your credit score. With responsible use, including making on-time payments and keeping your credit utilization low, secured credit cards can potentially increase your credit score by a median of 24 points over two years of use.