There’s a lot to love about credit cards. You can use them anywhere, there’s built-in fraud protection, and the potential to earn cash-back rewards on some cards.
On the other hand, you might feel cautious about using that plastic. Maybe you’ve been burned in the past and have poor – or no – credit history. Or you might be worried about maxing out your cards.
If you’re working on boosting your score, consider a secured credit card. A secured card usually requires a security deposit upfront to open the account. Having one can keep your balance low and ultimately help you take control of your credit situation.
Wondering if a secured credit card is right for you? Read on to learn how a secured credit card works, how to get one, and what makes it different from unsecured credit cards.
What is a secured credit card?
A secured credit card requires a cash deposit as collateral when you open the account. The deposit serves as an insurance policy for the credit card company in case you can’t make your payments or default on paying back your balance.
If you use your secured credit responsibly, you can expect your credit score to increase. The secured credit card issuer may allow you to upgrade to an unsecured credit card. But if not, you can apply for a credit card elsewhere once your credit score is strong enough.
How do secured credit cards work?
A secured credit card works similarly to a debit card. The major difference is that you’re leaning on the existing line of credit tied to your security deposit. Secured credit cards typically have lower credit limits. While they’re usually around $200, they can be as high as $5,000.¹
Suppose you’re falling behind on payments for a period of time – usually 180 days – and have defaulted on your credit card. In that case, the card issuer can tap into your security deposit to recover what is owed.
Like a credit card, you can use a secured credit card anywhere the card is accepted. Plus, your payments are reported to the credit bureaus. On-time payments can help you build your score over time.
Unsecured vs. secured credit cards
At a glance, unsecured credit cards and secured cards appear to be the same, but they do have important differences.
Secured cards usually have lower credit score requirements for account approval. Unsecured cards usually require higher credit scores to qualify.
Another major difference is that secured credit cards usually require a security deposit that provides collateral should you default on your card. An unsecured credit card, on the other hand, doesn’t require a security deposit. Secured cards typically have lower credit limits than their unsecured counterparts.
You’ll also find that unsecured cards come with feature perks. While some may have opportunities to rack up reward points, they tend to be less robust than unsecured rewards or travel cards.
When should you get a secured credit card?
While a secured credit card can help you build your score, you’ll want to ensure it’s a sound choice. Here are some reasons why it might be a good idea to get a secured credit card:
You want to build your credit
A major draw of a secured credit card is that it can help you improve your credit. You can gradually build your credit score by keeping your credit usage low and prioritizing your monthly payments so that you pay on time.
While a credit score isn’t the totality of what a lender or creditor looks at when extending you a loan or line of credit, it is a significant factor. You’ll stand a stronger chance of getting approved with a high score. Plus, you’ll qualify for lower interest rates and better terms.
You want to graduate to an unsecured credit card
Some secured cards give you the option to upgrade to an unsecured card. The details depend on the card, but if you make a series of on-time payments, you might be eligible to graduate to one.
Secured cards don’t require an initial deposit, and can feature higher credit limits and better perks and rewards.
You want a card with a lower credit limit
If you’re more comfortable with a credit card with a lower credit limit, then a secured card can be a good choice. If you’re new to the world of credit-building or have been burned in the past, you might want to start off with a card with a lower cap.
See if you can pay off the balance each month. That way, you can build your credit without racking up a balance.
You don’t need a card with rewards and perks
Is bolstering your credit score the main purpose of opening a credit card? If so, you might not want a credit card with reward-earning potential and perks. While it’s nice to earn rewards and enjoy lounge access and trip delay insurance, these incentives are designed to get you to spend more.
In turn, you might be better off with an unsecured card, where you can focus on paying off your balance and building credit.
Pros and cons of secured credit cards
Secured credit cards can offer new borrowers or borrowers with bad credit benefits, but they also come with potential drawbacks.
Pros
Let’s start with the pluses of secured credit cards:
- They can be a good option if you want to establish or build credit
- You can get a refundable deposit when you close your account
- You don’t need a high credit score to get approved
- You can work your way up to an unsecured credit card
- They might come with fraud protection
Cons
And here are the minuses of secured credit cards:
- You might have to pay high fees and interest rates
- They might have low credit limits
- You’ll need to provide cash upfront
- They might have fewer rewards and perks
- You can lose your deposit if you miss payments
Improve your credit with an unsecured card
With mindful usage, an unsecured credit card can be a great option to add to your arsenal of credit cards to build credit. While you do have to offer a security deposit upfront, by staying on top of your monthly payments and keeping a low balance, you could see a jump in your score over time.
However, credit cards aren’t the only way to build credit. Learn how to build credit without a credit card.
FAQs
Can you get denied for a secured credit card?
As with any credit card, getting approved for a secured card isn’t guaranteed. Each credit card issuer has its own policies and requirements, and may also have additional approval requirements beyond the security deposit.
What is a good APR for a secured credit card?
Every secured credit card is different in terms of fees and APRs. Lower credit scores usually mean higher interest rates, so if you’re starting from scratch with credit, you should expect a higher APR.
Secured cards can come with more than one APR, and you may have different ones for:
- Purchases
- Balance transfers
- Cash advances
The fees you pay can also vary. Some secured cards charge an annual fee, while others charge anything. Some may also charge a monthly service fee or a fee to increase your deposit.
How much will a secured credit card raise my score?
It’s hard to say exactly how much a secured credit card will raise your credit score or how fast your score will improve.
Let’s say you pay your bills on time and maintain a low credit utilization rate. If so, you might start to see an improvement as soon as 30 to 45 days after you’ve started to make changes.² If you start with a bad credit score, you can expect to qualify for an unsecured card for fair credit within 12 to 18 months.³
What is the difference between secured and unsecured credit cards?
Unlike unsecured credit cards, secured credit cards require an initial security deposit, which typically matches your credit limit. If you deposit $500, your credit limit will likely also be $500. This lowers the risk to the credit card issuer, which is why people with low or no credit have an easier time getting approved.
Do secured credit cards build credit?
When you sign up for a secured credit card, check to make sure the card issuer reports activity to the major credit bureaus. If they do, the card can help you build credit if you make on-time payments in full each month.