What Is a Secured Credit Card?

A secured credit card is a type of credit card backed by a cash deposit from the cardholder. This deposit acts as collateral on the account, providing the card issuer with security in case the cardholder can’t make payments. With a secured credit card, the amount that you put down in a deposit becomes the credit limi💦t for your credit card.

Secured credit cards are often issued to subprime borrowers or those with poor or limited 澳洲幸运5官方开奖结果体彩网:credit histories (so-called 澳洲幸运5官方开奖结果体彩网:thin-file borrowers). Because the card issuer will report on secured credit cards to credit reporting agencies, these cards can help borrowers improve their credit scores.

How a Secured Credit Card Works

Most credit cards are unsecured, meaning you're borrowing money without pledging any assets (collateral) up front, like cash; nothing guarantees or “secures” your ability to pay off your accrued balance to the credit card company. This lack of security for credit card companies is one of the main reasons credit card companies set such high interest rates on unpaid balances; they're taking on more risk, so they want to be compensated for it.

On the other hand, a secured credit card requires the borrower to put some skin in the game: a cash deposit. This deposit is often the same as the credit limit on the card. So, for example, if you want a $5,000 limit on your card, you'll need to put down $5,000 in cash. This collateral protects the lender in case you can't pay your bill; if you don't pay, they have the collateral to recoup their loss. This makes secured credit cards a good option for people to build or rebuild their credit.

How to Apply for a Secured Credit Card

You can apply for a secured credit card in the same way thatꦰ you would apply for a regular credit card. They are issued by nearly all lead🤪ing credit card lenders, like Visa, Mastercard, and Discover, and look just the same.

Cardholders can use the card anywhere the card brand is accepted and may be eligible for perks and rewards. Cardholders also receive monthly statements showing their end-of-period balances and the activity on the card during the specified month. They’re responsible for paying at least the minimum due, and they pay interest on outstanding balances, which is detailed in the credit agreement.

Secured credit cards may come with an 澳洲幸运5官方开奖结果体彩网:annual fee—like on a regular card. They may also impose a few other charges, like initial setup or activation fees, credit increase fees, monthly maintenance fees, and balance inquiry fees. All these can and do cut into the deposit and the amount of available credit, so check the details before signing up.

With secured credit cards, you do put up something as part of your agreement with the card company. When you apply for secured credit cards, the card issuer assesses your 澳洲幸运5官方开奖结果体彩网:credit score and credit history through a 澳洲幸运5官方开奖结果体彩网:hard inquiry with a credit reporting agency. It then determines the amount of deposit needed to open an account and the credit line it will extend to you.

How Do Secured Credit Card Deposits Work?

With a secured credit card, the amount of cash you deposit becomes your 澳洲幸运5官方开奖结果体彩网:credit limit—the amount you can charge on the card. Since the deposit made to open the secured credit card account serves as collateral, it is not accessible to the borrower oncಌe it has been paid, but it stays in reserve.

You can lose your deposit, but secured card issuers usually use it only if you default or miss a certain number of payments. If you cancel the card, you will receive your deposit back, assuming your balance has been paid off. Alternatively, some secured credit card providers will regularly review a borrower’s payment history and convert a secured credit card into a regular credit card if they meet payments. In this case, you will also receive your deposit back.

Is a Secured Credit Card Good?

Secured credit cards are an expensive way to access credit, but they can be very useful for people lookin💟g to rebuild their credit scores.

There are other a number of costs involved with secured cards that make them an expensive way to borrow. Secured cards’ 澳洲幸运5官方开奖结果体彩网:annual percentage rates (APRs) tend to be on the high side—often more than 20%—and are currently in line with the national average of 24.74% as of September 2024. But if you are a secured-card candidate,♔ your credit score is presumably not the strongest, and you wouldn’t qualify for the best rates anyway. So, 20% or more may not be that much more expensive than other🐲 forms of credit available to you.

On the other hand, secured credit cards can be great for borrowers looking to improve their credit scores. Secured credit cards are aimed at people with poor or minimal credit history—those with trouble qualifying for a regular credit card. The deposit they put up compensates the card company for the extra risk of extending credit to them.

How to Build Credit With a Secured Credit Card

Obtaining a secured credit card and then using it responsibly for several months or a couple of years can be a recommended way to establish or improve your credit history and boost your credit score. Unlike a prepaid credit card, which functions more like a debit card, a secured credit card will send your account history to the credit bureaus to be included in your 澳洲幸运5官方开奖结果体彩网:credit report. This means that using a secured card can gradually♐ improve your credit score.

In fact, if you maintain a positive payment history, secured c꧑ard lenders may increase your credit limit over time or even offer to upgrade you to an unsecured card (in which case, you can get your deposit back). Maintaining that positive history usually means paying off balances in full each month—and, of course, paying on time. If you miss payments, lenders will report delinquencies to the credit reporting agencies, whi꧃ch won’t improve your credit score.

Be warned, however, that improving your credit score this way can do more harm than good if you miss payments. While consumers typically obtain secured credit cards to improve their credit, their credit scores can be damaged if any delinquencies arise. 

Example of a Secured Credit Card

The Discover it Secured Card is one of the most popular secured cards on th🎉e mark𝔉et, and it has fees and interest rates that are typical of secured cards.

Discover generally accepts borrowers in the “fair” credit category—those with a credit score in the 580–670 range—along with borrowers with a minimal credit history. The minimum security deposit required to open the account is $200, and the maximum credit limit can be up to $2,500, depending on your income and ability to pay. After eight months, the account is reviewed to see if it qualifies for transfer to an unsecured card when the borrower’s deposit can be refunded.

The Discover it Secured Card offers numerous cash-back rewards and has no annual fee—just like unsecured Discover cards. It carries a variable APR of 28.24% as of September 2024.

The Bottom Line

Secured credit cards are a type of credit card that are backed by a cash deposit. This reduces the risk of lending to borrowers with poor or limited credit histories, and these borrowers can use secured credit cards to improve their credit scores. Secured credit cards generally come with high levels of fees and interest, but they can allow borrowers to improve their credit history and access lower-cost forms of credit.