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A secured credit card works nearly the same as a traditional, unsecured credit card, except it requires you to make a refundable security deposit that usually equals your credit limit. Using a secured credit card responsibly can offer a way to improve your credit score, especially if you have bad credit, no credit or a thin credit file.
To decide whether a secured credit card makes sense for you, you need to know how secured credit cards work, how to get one and how to use it to build credit.
How a Secured Credit Card Works
You can pay for things with a secured credit card the same way you would with a regular, unsecured credit card. The major difference is that the card is "secured" by a security deposit you give the card issuer when opening the account. Because this reduces the card issuer's risk, they may be more likely to approve your application even if you have a poor credit score or no credit history.
Common features of secured cards include:
- Security deposit: This is a refundable deposit you make to guarantee the secured credit card account. The required security deposit may be as low as $200, though the amount may vary depending on the card issuer. If you default on your credit card balance, the card issuer can use the deposit to cover it. That doesn't mean you use the security deposit to pay your monthly credit card bill, however. Missing payments can result in credit score harm and possible account closure. You will get the deposit back when you close the account or convert the card to an unsecured credit card (assuming you don't default).
- Credit limit: Your credit limit is the maximum amount you can spend on the card. In most cases, your credit limit is equal to the amount of your security deposit. You may be able to increase your credit limit by adding to your initial security deposit or by making a certain number of on-time payments.
- Monthly billing cycle: Credit cards are billed on a monthly cycle. You have the option to pay off your purchases in full at the time payment is due, or pay only part of the amount, as long as you make the minimum monthly payment the card issuer requires.
- Carrying a balance: If you don't pay off your purchases in full by the payment due date, the unpaid balance rolls over to the next month. This is called carrying a balance on your credit card. Until you pay it back, this balance accrues interest at the card's annual percentage rate (APR).
Secured Credit Card vs. Unsecured Credit Card
Both secured and unsecured credit cards can be used to make purchases up to your credit limit that you then pay back at your own pace. As you pay the money back, you can borrow from your credit line up to the credit limit. If you carry a balance on your card instead of paying each month's bill in full, you'll be charged interest.
Despite these similarities, there are some important differences between secured and unsecured credit cards.
|Secured Cards vs. Unsecured Credit Cards|
|Secured Credit Cards||Unsecured Credit Cards|
|Require a refundable security deposit||No deposit required to open account|
|Amount of security deposit amount typically determines your credit limit||Card issuer uses your credit history, credit score, income and other factors to approve or deny credit|
|Card issuer can use the deposit to pay off your balance if you default||Your creditworthiness determines your credit limit|
|Easier to get than unsecured credit cards if you have poor or no credit||Having poor or no credit can make it harder to qualify for an unsecured card|
|APR may be higher than you'd get with an unsecured credit card||Usually has lower APR than secured credit cards|
|Deposit is refunded if you close the account or convert the card to an unsecured card|
How to Apply for a Secured Credit Card
If you think a secured credit card makes sense for you, follow these steps to apply for one.
- Check your credit report and credit score. You can do both for free through Experian. If your credit isn't quite where you'd like it to be, you can make moves to improve your credit.
- Compare secured credit cards. Use Experian CreditMatch™ to get matched with secured credit cards that fit your credit profile. When reviewing your secured credit card options, compare the following features:
- Credit limits
- Fees, such as annual fees, late fees and application fees
- Cardholder perks and benefits, such as cash back, points or miles
- Make sure the card issuer reports your card activity to at least one of the three major credit bureaus (Experian, TransUnion or Equifax). This way, using the card will help you to build credit.
- Apply for a secured credit card. You can apply for a credit card online through Experian CreditMatch™ or on the card issuer's website.
- Pay the security deposit and any other fees to open your account. For example, there may be application fees, processing fees or annual fees. You can pay by debit or electronic transfer from your bank account. Make sure you have enough money to cover the total amount you'll owe.
How to Use a Secured Credit Card to Build Credit
Using a secured credit card responsibly is an excellent way to build credit. Here are the actions that'll help you do so.
- Make small purchases each month. Using your credit card regularly and paying your bill on time helps you build credit. Keep your purchases minimal so you can easily pay the bill. For example, you could use your secured card to pay for a streaming subscription or buy lunch once a month.
- Keep credit utilization low. Your credit utilization ratio is the percentage of available credit that you're currently using. Keeping the ratio below 30% can help improve your credit score. Since secured credit cards generally have low credit limits, you'll need to be careful to avoid going above a 30% ratio. For instance, for a card with a $200 limit, you'll want to keep your balance below $60.
- Stay on top of your spending. Monitoring your spending ensures you don't build up a balance you have a hard time paying off. You can use the credit card company's mobile app to track your card usage so you don't overspend.
- Pay your bill on time. If your secured credit card reports your payment history to at least one of the three major consumer credit bureaus, making timely payments can help improve your credit score. Put a reminder on your calendar of when your payment is due. Setting up autopay is also a good way to ensure you don't miss a due date. Just be sure you have enough money in your account to cover the payment when it comes due.
- Pay your balance in full each month. Carrying a balance on your credit card not only results in interest charges, but it can also increase your credit utilization ratio, which may hurt your credit score. If you can't pay your balance in full, make at least the minimum monthly payment. Then try to pay down the balance as soon as you can.
- Keep an eye on your credit score. Improving credit is a common reason for getting a secured credit card, so you'll want to see how your card usage affects your credit score. Some secured credit cards offer free credit monitoring. If yours doesn't, you can sign up for free credit monitoring from Experian.
Build Better Credit With a Secured Credit Card
Using a secured credit card responsibly can help you improve your credit score, but there are other ways to build your credit too. For example, you could get a cosigner on a credit card or become an authorized user on someone else's credit card. You can also sign up for Experian Boost®ø, a free feature that reports your utility, cellphone and streaming service payments to credit bureaus. When you use Experian Boost, making these payments on time can potentially boost your credit score.
Learn More About Secured Credit Cards
- How to Get a Secured Credit Card
If you have poor or limited credit history, getting approved for a secured credit card can be easier than getting a traditional credit card.
- How to Use a Secured Credit Card
A secured card can help you establish your credit history or improve a poor credit score, but they work a little differently than a traditional card.
- How to Rebuild Credit
Good credit can make many of life's financial situations easier and less costly. For example, with good credit, you can get approved for a mortgage or auto loan, and...
- Do Secured Credit Cards Build Credit History?
Secured cards that report to the credit bureaus and managed correctly can help you build credit. But there are other steps to help improve your score.
- What Is a Partially Secured Credit Card?
If your credit is in bad shape, you may not qualify for an unsecured credit card. A partially secured credit card is one way to start building credit.
- How Long Should I Keep a Secured Credit Card?
There are no rules about how long to keep a secured credit card open. But you should be intentional about using it to steadily build your credit.
- Best Secured Credit Cards of 2022
Secured credit cards can help you build a strong credit history. Here are our top picks.
- How Secured Credit Card Deposits Work
What is a deposit on a secured credit card and how does it work? Here’s everything you need to know about secured credit card deposits.