What Is a Secured Credit Card? Definition & Examples
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A secured credit card is a type of credit card for people with limited or damaged credit that requires the user to place a refundable security deposit, which the card’s issuer holds as collateral until the account is closed. This deposit makes it less risky for banks and credit unions to issue credit cards to inexperienced applicants and people with a history of payment problems. If something goes wrong, the issuer can just keep the money. As a result, secured credit cards offer the highest approval odds of any type of credit card. And they don’t need to charge the same high fees as unsecured credit cards for bad credit.
A secured credit card can help you build or rebuild your credit, just like a “normal credit card.” In fact, secured credit cards are indistinguishable from unsecured cards on credit reports. All major secured cards report account information to the major credit bureaus on a monthly basis. And if that information reflects on-time payments, your credit standing should improve, assuming you manage the rest of your finances responsibly.
The one thing a secured credit card generally won’t give you is the ability to actually borrow money. Most secured credit cards are fully secured, which means your spending limit will equal your deposit amount. It is very rare to find a partially secured credit card, which gives you a line of credit in excess of the amount that you put down. So a secured card is not where you should turn for emergency financing.
But you should definitely get a secured credit card if lost-cost credit improvement is your top priority. And if you’re not sure how your credit is doing, you can check your latest credit score for free on WalletHub, the only site with free daily updates. You’ll also receive personalized credit-improvement advice to help you qualify for a good unsecured card in no time.
Below, you can learn more about what secured credit cards are, how they work and how to find the right offer for your needs.
How Secured Credit Cards Work
The only thing that’s unique about a secured credit card is the security deposit that you have to place to get one. This deposit generally doubles as your spending limit, preventing you from charging more than you can afford to repay. So you’re not really borrowing anything with a secured credit card, which is why such cards are easy for even people with bad credit to get.
The deposit requirement also helps explain why secured credit cards are so much cheaper than unsecured credit cards for people with bad credit. Repayment for balances racked up with an unsecured card isn’t guaranteed, so issuers charge non-refundable fees to compensate.
The combination of high approval odds and low fees make secured cards the best tool available for building or rebuilding your credit. But they’re still fairly unfamiliar to most people. So we’ll give you a step-by-step overview of what to expect when you get one.
Here’s how a secured credit card works:
- You place a refundable security deposit using a bank transfer. A debit card or check could be an option, too, depending on the card. Some secured cards require you to place a deposit when you apply, others after you’re approved. The minimum deposit for most secured cards is $200 or $300.
- The amount of your deposit becomes your spending limit. This prevents you from spending more than you can afford to repay, which benefits both you and the card issuer in the long run. For what it’s worth, you can usually add to your deposit over time for more spending power.
- The credit card company holds your deposit as collateral. The funds are usually kept in a custodial account that does not bear interest.
- Purchases and payments are the same as with any other credit card. You can spend up to your credit limit. You’ll have to pay your bill by the due date each month. And any balance you carry from month to month will accrue interest.
- You get the deposit back when you close your account. You’ll have to bring your account balance to zero first. But after you do (or the issuer subtracts what you owe), you’ll get a check or bank transfer returning your deposit money.
After using a secured credit card responsibly for at least 12 months, you should be able to graduate to an unsecured credit card. Your secured card’s issuer might even offer to convert your account to unsecured by giving back your security deposit. If your card doesn’t charge an annual fee, you should definitely consider keeping it open. This would help make your credit history appear longer, benefitting your credit score. But you should still shop around to see if you qualify for a better card to use on an everyday basis.
You can track your progress for free on WalletHub, the only site with free credit scores and reports that are updated on a daily basis. You’ll also receive personalized credit-improvement advice to help you graduate to an unsecured card sooner.Get Your Personalized Credit Advice – 100% Free
Best Secured Credit Card Examples
You won’t truly understand secured credit cards until you get into the nitty-gritty with some actual offers. So WalletHub’s editors compared dozens of secured cards and picked some of the best, most popular offers for you to consider. Each of their selections, which you can check out below, is a great example of what you should look for in a secured credit card.
Here are some of the best secured credit cards:
Capital One® Secured Mastercard®
OpenSky® Secured Visa® Credit Card
Discover it® Secured
First National Bank of Omaha Secured Visa® Card
Citi® Secured Mastercard®
|Rewards Rate||1 - 2% Cash Back|
|Purchase Intro APR||Not Offered||Not Offered||Not Offered||Not Offered||Not Offered|
|Transfer Intro APR||Not Offered||Not Offered||10.99% for 6 months|
Transfer Fee: 3% intro balance transfer fee, up to 5% fee on future balance transfers (see terms)*
|Not Offered||Not Offered|
|Regular APR||26.74% (V)||18.89% (V)||24.49% (V)||20.24% (V)||23.99% (V)|
|Editors’ Rating||5.0 / 5||4.0 / 5||5.0 / 5||N/A||4.6 / 5|
|Details, Rates & Fees||Learn More||Learn More||Learn More|
Rates & Fees
|Learn More||Learn More|
Secured credit cards with no annual fee aren’t always available. But if you can find one, getting it and paying your bill in full and on time every month will leave you with a better credit score and more money.
Secured Credit Card Alternatives
If you have bad credit and don’t need a small emergency loan, there’s no need to even consider other options. A secured credit card is definitely your best bet. It’s just a matter of finding the best one for your needs. And we generally recommend starting with any no annual fee offers that are available and then using rewards as a tiebreaker. You shouldn’t worry about interest rates because you shouldn’t carry a balance from month to month with a security card. You have to pay the security deposit, so you’d basically be lending money to yourself and charging a high rate of interest on the balance.
If you have damaged credit and need a line of credit to pay for emergency expenses, you’ll have to make do with an unsecured credit card for bad credit. Such cards are known for charging extremely high rates and fees for very little added spending power. So they should be avoided whenever possible.
If you have limited or no credit, secured credit cards may have some competition. For example, some starter credit cards don’t charge annual fees or require a security deposit. And even better, student credit cards add lucrative rewards to the mix.
Finally, it’s worth noting that prepaid cards won’t be of much help in terms of either credit building or short-term financing. Prepaid cards don’t affect credit scores because they’re not included in our major credit reports. And they don’t provide any sort of loan or line of credit. They’re more like debit cards without the checking account.
If you still have questions about secured credit cards, you can probably find the answer on WalletHub’s Secured Card FAQ page.
Image: Lawkeeper / Shutterstock
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