How Does a Secured Credit Card Work?

Yes, secured credit cards are good for rebuilding credit because they report to the major credit bureaus every month and they're easy to get approved for, even with bad credit. A refundable deposit is required to open a secured card account, which reduces the lender's credit risk. As a result, secured credit cards are cheaper and more accessible than unsecured credit cards for bad credit.

Secured credit card approval is not always guaranteed, though. You may be turned down for a secured card if there are certain items on your credit report such as an unresolved bankruptcy.

Why Secured Credit Cards Are Good for Rebuilding Credit

Secured credit cards report to the major credit bureaus every month

The account information lenders report to the major credit bureaus ultimately determines your credit score, and secured cards report account info every month just like any other credit card account. Positive information that gets reported as a result of things like on-time bill payments will help offset any past credit mistakes and will strengthen a weak credit history. Of course, any adverse credit activity that's sent to the credit bureaus could damage a shaky credit profile even further.

You can set your credit limit based on the amount of the refundable security deposit

A secured card's required security deposit can be as low as $200 or $300 in most cases, and the amount of your deposit usually becomes your credit limit. Most secured cards will also allow you to increase your credit limit by adding funds above the minimum amount. Low credit utilization is an important factor in a good credit score, so the ability to increase your credit limit can be a useful tool when you're rebuilding credit.

Some secured credit cards don't require a credit check

A handful of secured cards don't perform a hard pull on your credit report when you apply. That's a huge plus if you have bad credit because a hard pull could temporarily hurt your already-low credit score. Dicey credit history also won't prevent you from being approved when there's no credit check.

No credit check credit cards still report your account information to the major credit bureaus every month, so you'll have an opportunity to rebuild your credit history, as long as you manage your accounts responsibly.

Other Helpful Tips for Rebuilding Credit

A secured credit card is only good for rebuilding credit if you manage the account responsibly. That means paying the monthly bill on time, every time and not overspending. As a rule, you should try to keep your statement balance below 30% of your credit limit.

You can also rebuild credit just by having the card and not using it, as long as the account remains in good standing. Signing on to someone else's account as an authorized user is another option worth considering, as credit card issuers don't perform credit checks on authorized users.

If you're not sure whether a secured credit card is right for you, check out our editors' picks for the best credit cards to rebuild credit, which include both secured and unsecured cards, to help narrow your search.

The main difference between a secured credit card and an unsecured credit card is that secured cards require you to place a refundable security deposit when you open your account. Apart from this security deposit, secured and unsecured credit cards aren't necessarily better or worse for your credit. The amount of this deposit typically serves as the credit limit for the secured card, which means you have to pre-pay for purchases with a secured card. You'll usually have to put down the deposit when you apply, and you'll get it back when you close your account or upgrade to an unsecured credit card. Unsecured credit cards, on the other hand, give access to a credit line that isn't “secured” with a deposit.

There is no difference between secured and unsecured credit cards when it comes to building credit. All major secured cards report account information to the major credit bureaus on a monthly basis, just like unsecured cards. In fact, you can't tell secured and unsecured cards apart on a credit report. So as long as you use either type of card responsibly, your credit score will improve.

Below, you can get a better feel for the differences and similarities between secured and unsecured credit cards by seeing how they compare in several important categories.

Secured vs. Unsecured Credit Cards: Key Differences

Approval Odds of Secured Credit Cards vs Unsecured Credit Cards

Secured credit cards are easier to get approved for than unsecured cards. Because you're technically pre-funding your credit line with a secured credit card, you can't spend more than you can afford to repay. The deposit is held in an account by the card issuer, so if you don't pay your bills, the deposit is used to cover the cost. That's why secured credit cards are able to offer nearly-guaranteed approval to people with bad credit, while charging very reasonable fees. That being said, secured credit cards are real credit cards – they have interest rates, and you have to pay your monthly bill on time.

In contrast, unsecured credit cards tend to be harder to get, because the card issuer takes on a lot more risk by extending an unsecured credit line. In other words, you can spend more on an unsecured card than you can afford to repay. There are unsecured credit cards for people of all credit levels, but if you have bad credit, you're likely to pay high non-refundable fees for a very small line of unsecured credit.

Choosing Between Secured & Unsecured Credit Cards

Overall, the toughest decision between secured and unsecured credit cards comes when you have damaged credit. With bad credit, it's harder to get approved for an unsecured credit card, and the unsecured options available to people with bad credit are far less attractive.

If you have limited, fair, good or excellent credit, you should be able to start with a solid unsecured card. If you've got bad credit and the flexibility to choose either a secured credit card or an unsecured one, always go secured. It will cost you a lot less in the long run and help you build credit just the same. You can check your credit score for free on WalletHub to see where you stand.

All major secured credit cards report to at least one of the big three credit bureaus, TransUnion, Equifax, and Experian, on a monthly basis. In fact, five of the most popular secured cards, those from Discover, Capital One, Citi, Wells Fargo and Bank of America, report to all three credit bureaus, according to Discover's website.

When you get a secured credit card, the account should appear on your credit report within 1-2 months. After that, secured cards generally report the day your statement is made available each month.

The fact that secured cards report to the bureaus means they can help you build credit when used responsibly. That means paying your bill on time when there's an amount due and only using a small portion of your spending limit. If you do that, the monthly reporting will fill your credit file with positive information.

The Capital One Platinum Secured credit card works like a regular credit card, except that the customer must put down a security deposit to open the account. The minimum deposit amounts are $49, $99 or $200, based on your credit.

Typically, the amount of a secured credit card's security deposit determines its credit limit. However, the two amounts don't always match with the Capital One Platinum Secured card. Regardless the security deposit amount, you're guaranteed at least a $200 credit limit. Not everyone is approved for one of the card's lower security deposits, though.

What you should know about the Capital One Platinum Secured:

• After you pay the security deposit in full, you can use the Capital One Platinum Secured card for purchases, just like a regular credit card. 
• You won't earn rewards on your purchases, as this card's primary purpose is to help you establish or rebuild credit. Capital One Platinum Secured reports to the major credit bureaus every month.
• Capital One may also increase your credit limit with no increases to the security deposit. You become eligible after making your first six payments on time.
• Once you've built a solid credit profile with the Capital One Platinum Secured credit card, the issuer may graduate the card to an unsecured account. You will receive your deposit refund as a statement credit which will be applied to the unsecured account balance. 

It is worth noting that you may also close the Capital One Platinum Secured card account and apply for an unsecured card on your own once you've built a solid credit profile.

You can use a secured credit card to make purchases in the same way you would use a regular credit card. The only major difference is the security deposit that you need to put down when you open an account. The minimum deposit required is usually $200-$300, which serves as your credit limit. You may also be able to add more money to the deposit later on, to increase your credit line.

Here's how secured credit cards work:

Secured cards look just like any other credit card. Swiping or dipping your card in a merchant's payment terminal is exactly the same. And secured credit cards are accepted anywhere that takes Mastercard, Visa, Discover or American Express, depending on which network your card is on.

The keys to using a secured credit card, as with any credit card, are to spend within your means and to pay your bill by the due date every month. That will help you build or rebuild your credit as safely and inexpensively as possible. Using only a portion of your credit limit and always paying your monthly bill in full are good habits, too.

Steps to get and use a secured credit card:

1. Compare secured credit card offers to find a card with a low annual fee, and confirm you meet the approval requirements.
2. Open a checking account, if you don't already have one. Many secured credit cards require applicants to have a bank account.
3. Submit your application and your $200 to $300+ refundable security deposit. Typically, you won't have to place the deposit until after you're approved. But sometimes, you will have to do it when you apply (they won't take the money if you're denied).
4. Set up automatic payments from your bank account, so you never miss a due date.
5. Make purchases with your secured credit card anywhere that accepts your card's network. But you don't even have to use it for purchases to build your credit. Just having the account open and in good standing helps your credit score.
6. Try to make sure the balance reported on your monthly statements is less than 30% of your credit limit.
7. Pay at least the minimum amount required by the due date every month. That will keep improving your credit score. And you can avoid interest by paying your full balance.
8. Keep track of your credit card statements and your credit reports to make sure there are no errors. Report any mistakes that you find.

Learning how to use a secured credit card is easy. Learning how to use a secured credit card responsibly is a bit harder. But as long as you pay your bills by the due date, you should see your credit score improve before long.

The biggest reason why someone would use a secured credit card is to rebuild bad credit. Secured cards are the best tool for the job because they offer nearly guaranteed approval and report account information to the major credit bureaus each month. As long as you always pay the bill on time, positive information will gradually cover up past mistakes, improving your credit score.

Secured cards are also much cheaper in the long run than unsecured credit cards for bad credit, thanks to the refundable security deposit required to open the account. The deposit amount usually becomes your credit limit, preventing you from spending more than you can afford to repay and reducing the risk for the issuer. As a result, secured cards tend to have much lower fees than unsecured cards for bad credit. 

Reasons Someone Would Use a Secured Credit Card

High Approval Odds. You can get approved for a secured credit card no matter how damaged your credit may be. Some secured cards don't even do a credit check on applicants.

Low Costs. Secured cards tend to have very low annual fees, thanks to their refundable security deposit. Just make sure to pay the bill in full every month because they aren't known for attractive APRs.

Credit Improvement. Despite their differences, there's nothing on your credit report that distinguishes secured cards from unsecured cards. If you pay your monthly bills on time and otherwise manage your account responsibly, your credit score will improve.

Budgeting. By making your spending limit equal to the amount of your security deposit, secured cards prevent you from borrowing more than you can afford to repay.

Convenience. A secured credit card allows you to make purchases that can't be completed with cash, such as car rentals, hotel bookings and online shopping. You'll also benefit from the security of $0 fraud liability.

If you're worried about missing payments or falling into bad habits, remember that you can still benefit by opening a secured credit card, activating it and never actually using it. Even though there won't be activity on your account, your payments will be listed as on time when the creditor reports information to the credit bureaus each month. You can't be late on a payment when none is due, after all. This will benefit you month after month, improving your credit score over time. Just don't forget to pay your annual fee, if any, and the rest will take care of itself.

To learn more, check out WalletHub's secured credit card guide. You can also check your latest credit score for free on WalletHub, as well as identify opportunities for improvement with our personalized credit analysis.

The benefits of a secured credit card include low fees and the opportunity to rebuild your credit no matter how bad it might be. The best secured cards have no annual fee and will accept people with credit scores in the 300-640 range, along with applicants who have no credit score at all. Secured cards also report account information to the major credit bureaus on a monthly basis and appear no different on credit reports than unsecured cards.

There are also some benefits that might initially seem like drawbacks. For example, having to place a security deposit is not ideal. Neither is being unable to spend more than the amount of that deposit before making a payment. But these two features do benefit cardholders by helping them avoid interest rates and by making it impossible to spend more than you can afford to repay. Plus, a secured card's deposit is fully refundable when you close the account and bring the balance to zero.

8 Benefits of Secured Credit Cards:

1. Credit building potential: If you use your card responsibly, you can establish good credit or rebuild your credit standing after past troubles. Secured cards report to the credit bureaus just like unsecured cards do.
2. Easier approval: Secured credit cards are available to people with bad credit or no credit history. Some secured cards don't even check applicants' credit history.
3. Low/no annual fees: Secured cards have fairly low fees because the refundable security deposit they require helps the issuer avoid losing money. Many of the best secured credit cards even have $0 annual fees.
4. Credit card-only transactions: You can use a secured card in situations where other payment methods (e.g. cash) may be limited. For example, if you're planning to book a hotel or rent a car, you will need a credit card to secure the reservation.
5. Rewards: Earn cash back, points, or miles on every purchase with select secured rewards cards.
6. $0 fraud liability: No major credit card issuer will hold you liable for fraudulent purchases on your account. That's true with all credit cards, not just secured cards.
7. Car rental insurance: Certain credit cards also cover you for theft and physical damage when you charge the car rental to your card.
8. Roadside assistance: Certain secured cards give cardholders access to a free 24-hour phone line that dispatches help with jump starts, towing, gas, tire changes, and more. Just note that repair charges from the service provider automatically get billed to your card.

Just keep in mind that it's important to use a secured card responsibly in order to take advantage of its benefits. That means paying the bill on time (and preferably in full) every month and staying well within your credit limit. This behavior will help you build a good credit score. And you'll eventually qualify for an unsecured card with no deposit, a higher credit limit, better benefits, and more favorable terms.

Despite all the advantages of a secured card, there are some drawbacks. For example, you won't have access to the cash you deposit until you close the account and pay the balance in full. Plus, if you have a pending bankruptcy or tax lien on your credit report, there's no guarantee you'll even be approved.

A secured business credit card works by requiring a business owner, an authorized representative of a business, or a person earning income as a sole proprietor to put down a refundable deposit to open the account. The deposit amount becomes the credit limit and gets refunded when the account is closed in good standing.

How Secured Business Credit Cards Work

1. You need to apply for the card first. Once you find a card you are interested in, fill out an application and submit it to the issuer. You will need to be the owner, an officer, or managing partner of a business to apply. Since it is a secured card, you can get approved with limited or bad credit.
2. Place a deposit to. Like all secured credit cards, you must pay a deposit before the issuer will mail the card to you. The minimum deposit amount will vary depending on the card, but the payment is refundable and will be used to set your card's credit limit.
3. On-time payments can help you build credit. Most business credit cards will only report your account information to the business credit bureaus – Equifax, Experian, and Dun & Bradstreet – and not to the credit bureaus that handle your personal credit. However, there are some that will report to the personal credit bureaus. Credit reporting practices will vary depending on the credit card you have. Paying off your balance and making on-time payments are both great ways to build your credit over time.

People with damaged credit looking for a way to separate their business expenses from their personal accounts can certainly benefit from a secured business credit card, but they will have limited options. There aren't many secured business credit cards currently accepting applicants.

That said, there are no laws saying business expenses must be charged to a business credit card rather than a regular consumer card. You could simply use a personal card (secured or unsecured) for your business expenses.

You can build credit with a secured credit card in as little as one to six months, but it can take many months or even years to build a consistently good or excellent credit score. The length of time also depends on whether you're building credit from nothing or rebuilding damaged credit.

If you have no credit, you could see a good score after just a few months of paying on time. You'll have a VantageScore after one month and a FICO Score after 6. With bad credit, though, it will probably take 12-18 months of responsible use for you to move up to the fair credit range. Secured credit cards are great for building credit because they are easy to get and report to the credit bureaus just like unsecured cards.

But it's hard to give you an accurate estimate of how long it will take to build credit with a secured credit card without knowing the details of your situation. That's where WalletHub can help. Just sign up for a free account, and we'll give you a personalized credit analysis that will tell you what to improve and give you a better sense of how long it will take.

Here's how long it takes to build credit with a secured credit card:

• If you have no credit, it will take 1 month to get a VantageScore and 6 to get a FICO score. Depending on how responsibly you use your card, your first score could be anywhere from bad to good.
• If you pay your bill on time and otherwise manage your finances responsibly, you can rebuild from a bad credit score (300-639) to a fair credit score (640-699) in approximately 12-18 months.
• A good credit score based on limited information could easily fall due to an increase in credit utilization or a single missed payment. Building and then keeping a good or excellent credit score requires consistency over time. This is a project measured in years.
• For people rebuilding credit, it will take 7-10 years for some negative information, like bankruptcies and late payments, to disappear from your credit report. But the older they are, the less impact they will have on your score.

If you're looking to rebuild your credit, secured credit cards are the best way to do it. They're easy to get and are indistinguishable from unsecured cards aside from the deposit requirement.

Rebuilding credit will take a while, so it's best to get started as soon as possible. Some good behaviors to practice are always paying on time and using less than 30% of your available credit.

Checking your credit reports regularly for errors and disputing any you find is also important.

The biggest reason why someone would use a secured credit card is to rebuild bad credit. Secured cards are the best tool for the job because they offer nearly guaranteed approval and report account information to the major credit bureaus each month. As long as you always pay the bill on time, positive information will gradually cover up past mistakes, improving your credit score.

Secured cards are also much cheaper in the long run than unsecured credit cards for bad credit, thanks to the refundable security deposit required to open the account. The deposit amount usually becomes your credit limit, preventing you from spending more than you can afford to repay and reducing the risk for the issuer. As a result, secured cards tend to have much lower fees than unsecured cards for bad credit.

Reasons Someone Would Use a Secured Credit Card

• High Approval Odds. You can get approved for a secured credit card no matter how damaged your credit may be. Some secured cards don't even do a credit check on applicants.
• Low Costs. Secured cards tend to have very low annual fees, thanks to their refundable security deposit. Just make sure to pay the bill in full every month because they aren't known for attractive APRs.
• Credit Improvement. Despite their differences, there's nothing on your credit report that distinguishes secured cards from unsecured cards. If you pay your monthly bills on time and otherwise manage your account responsibly, your credit score will improve.
• Budgeting. By making your spending limit equal to the amount of your security deposit, secured cards prevent you from borrowing more than you can afford to repay.
• Convenience. A secured credit card allows you to make purchases that can't be completed with cash, such as car rentals, hotel bookings and online shopping. You'll also benefit from the security of $0 fraud liability.

If you're worried about missing payments or falling into bad habits, remember that you can still benefit by opening a secured credit card, activating it and never actually using it. Even though there won't be activity on your account, your payments will be listed as on time when the creditor reports information to the credit bureaus each month. You can't be late on a payment when none is due, after all. This will benefit you month after month, improving your credit score over time. Just don't forget to pay your annual fee, if any, and the rest will take care of itself.

To learn more, check out WalletHub's secured credit card guide. You can also check your latest credit score for free on WalletHub, as well as identify opportunities for improvement with our personalized credit analysis.