What Is a Secured Credit Card?

Secured credit cards are a unique type of credit card that requires a cash deposit as collateral from the cardholder. This deposit serves as security for the card issuer in case the cardholder fails to make payments. The deposit amount determines the credit limit for the card, acting as a safeguard for the issuer.

These cards are commonly offered to subprime borrowers, individuals with poor or limited credit histories, also known as thin-file borrowers. By reporting to credit agencies, secured credit cards can assist borrowers in enhancing their credit scores.

Key Takeaways:

• A secured credit card requires a cash deposit as collateral if the cardholder defaults on payments.
• Despite the deposit, secured credit cards operate similarly to regular credit cards.
• Consumers typically opt for secured credit cards to boost their credit scores or establish credit history.
• Secured credit cards generally have lower credit limits and higher fees compared to unsecured cards.

How a Secured Credit Card Works

Most credit cards are unsecured, meaning there is no collateral securing the owed balance to the credit card company. In contrast, secured credit cards require a cash deposit to back the cardholder’s promise to make payments, lowering the associated risks for the issuer.

How to Apply for a Secured Credit Card

Applying for a secured credit card follows the same process as a regular credit card application. Major card lenders such as Visa, Mastercard, and Discover offer secured cards which function similarly to unsecured ones.

Cardholders can use secured cards widely and may enjoy perks and rewards. Monthly statements provide a detailed overview of transactions and balances, with users responsible for at least the minimum payment and accruing interest on outstanding balances, as stipulated in the credit agreement.

Annual fees are typical with secured cards, as are other charges like setup fees and maintenance fees, which impact the available credit limit and should be carefully reviewed before signing up.

When applying for a secured credit card, the issuer assesses the creditworthiness of the applicant via a credit check, determining the required deposit amount and credit line.

How Do Secured Credit Card Deposits Work?

The cash deposit put down by the cardholder becomes the credit limit on a secured card. This deposit serves as collateral and is reserved by the issuer, accessible only if the cardholder defaults on payments. Typically, the deposit is refunded upon card cancellation if the balance is cleared..

While the deposit may be used in case of missed payments, some providers may convert a secured card to an unsecured one for responsible borrowers, refunding the deposit.

Is a Secured Credit Card Good?

Secured credit cards are beneficial for individuals aiming to rebuild their credit history, although they come with associated costs. These cards can be a valuable tool for improving credit scores, especially for those with limited credit histories.

While secured credit cards tend to have higher APRs exceeding 20%, they provide access to credit for individuals with weaker credit profiles, making them a practical option for credit building.

Secured credit cards cater to those with poor credit histories or minimal credit profiles, offering a path to enhancing credit scores through responsible use. The initial deposit mitigates the increased risk for the card issuer.

How to Build Credit with a Secured Credit Card

Using a secured credit card responsibly over time can help establish or improve credit history and boost credit scores. Unlike prepaid cards, secured cards report account activity to credit bureaus, positively impacting credit scores.

Maintaining a positive payment history may lead to credit limit increases or the transition to an unsecured card, offering the possibility of reclaiming the deposit. Consistent timely payments are essential to preserve a favorable credit record, as missed payments can have adverse effects on credit ratings.

Although secured credit cards aid in credit improvement, delinquencies can harm credit scores

Using a secured credit card can enhance credit scores over time

Example of a Secured Credit Card

The Discover it Secured Card stands out as a popular choice among secured cards, reflecting typical fee structures and interest rates in the market.

Targeting borrowers with fair credit scores or minimal credit history, Discover requires a starting deposit of $200 with a maximum credit limit up to $2,500. After eight months, the card may qualify for an upgrade to an unsecured card with a refundable deposit.

Featuring cash-back rewards and no annual fee, the Discover it Secured Card carries a variable APR of 27.74% as of May 2023.

Do secured credit cards build credit?

Secured credit cards are designed to aid individuals with limited or poor credit history in boosting their credit scores. Consistent and responsible usage of secured credit cards can lead to credit score improvements and access to more cost-effective credit options

How does a secured credit card differ from an unsecured credit card?

While unsecured credit cards do not require a deposit, secured credit cards necessitate a cash deposit to secure the borrowed amount. The collateral mitigates risk for the card issuer, making secured cards available to borrowers with poor credit histories

How do I close a secured credit card?

Closing a secured credit card is usually straightforward, provided all payments are up-to-date with no outstanding balance. Contacting the card issuer is the typical process for closure. Upon closure, the deposit is refunded, with any applicable fees deducted by the issuer. Alternatively, regular payments may prompt the issuer to convert the secured card to an unsecured one

How can I change a secured credit card to an unsecured card?

Regular on-time payments on a secured credit card can enhance credit scores over time, potentially leading to eligibility for an unsecured card. Some card issuers automatically convert secured cards to unsecured ones for clients meeting payment requirements, often increasing credit limits along with the transition

The Bottom Line

Secured credit cards offer a valuable means of accessing credit for individuals with poor credit histories, aiding in credit score improvement. While they come with costs, secured cards can pave the way for better credit access and history in the long run.