What You Need to Know about Secured Credit Cards

When used responsibly, credit cards help us to build credit, but there’s a catch. You need good credit in order to qualify for a credit card. So how do you get around this catch-22? 

Behold, the middle child of paperless transactions: the secured credit card. 

A secured credit card differs from an unsecured credit card in that it requires a deposit. The deposit is used as a bridge to build trust between the borrower and the issuer. When used the right way, secured credit cards can give people with less-than-great credit a chance to redeem themselves. Most companies report activity to the three major credit bureaus, so it’s a good opportunity for new credit users and people with bad credit to practice using credit and work on building up their credit score. 

In the below sections, we’ll talk about secured credit cards and how you can benefit from having one. 

What is a secured credit card?

A secured credit card is a credit card that requires a security deposit from the borrower as a way to reduce risk for the lender. This makes it a great option for first time users or people who have poor credit. 

In most cases, the amount that you put down as your deposit is how much your credit limit will be. For example, if you put down a $200 security deposit at the time you sign up, your monthly credit limit will be $200. The deposit acts as a cushion in the event that you are unable to pay your bill. If you are unable to pay your bill, the issuer will use your deposit to cover the cost. 

Once you’ve established credit and made your payments on time, many of the leading companies may offer you the option to upgrade your secured credit card account to an unsecured card. Not all companies have this as an option, so once you are ready to upgrade to an unsecured card, you will need to apply for one through another company, and then close your secured card. 

After upgrading your card through the same credit card company, or closing your secured credit card, the issuer will give you a refund on your deposit. Every credit card issuer is different, so the minimum and maximum amount that you can deposit will vary, but most companies will request around $200. 

Secured cards vs. unsecured card

So how do you know if you’re someone who could benefit from a secured credit card? This depends on your credit score. 

To get an unsecured card, you don’t need to put down a deposit, but you do need to have at least average credit for most credit card companies. To get an unsecured card through one of the leading credit card companies, you will need to have good to excellent credit. Some will require that you pay an annual fee, and you will usually have a higher credit limit. 

This is not to say that you can’t qualify for an unsecured card with a low credit score, but you will usually have to pay very high fees per month or a much higher annual fee. If you have poor credit, it’s better to get a secured until you’ve improved your credit score, rather than getting a a high-fee unsecured card.

How secured credit cards work 

Most of the major credit card companies have both secured and unsecured credit card options. Secured credit cards work the same as an unsecured card once you pay the deposit. With a secured credit card, you can:

  • Use them to make purchases at stores, restaurants, online and anywhere else that credit cards are accepted.
  • Work toward building your credit by making payments on time and using your credit responsibly. 
  • Accrue interest on accounts with an outstanding balance. 

When shopping around for your secured credit card, pay attention to whether or not they require an annual fee. While having to pay an annual fee is pretty common, you should avoid spending any more than $50, especially because there are many secured cards that have a $0 annual fee.

If you’re looking to build—or rebuild—your credit but have a low credit score and can’t qualify for an unsecured card, a secured card could be a great way to ease into things. Just remember, your activity does get reported to the credit bureaus, so be wise and make sure to you pay your monthly balance on time. 

Secured credit cards vs. prepaid debit cards

Prepaid debit cards may share a few similarities with a secured credit cards. For example, you have to pay to use both cards and many of them will have either a Visa, MasterCard or American Express logo. However, they are completely different.

With a prepaid debit card, you are loading your own money onto the card and using it to make purchases as an alternative to carrying cash. You wouldn’t be borrowing money from an issuer.

Because these cards are not used on the basis of credit, your transaction history on the account will not be reported to the credit bureaus. This means that you aren’t building credit when using a prepaid debit card, while you are when you use a secured credit card. 

If you are looking to build credit, opt for a secured credit card instead. 

How secured credit cards can help rebuild credit 

When used correctly, a secured credit card can be an effective tool for improving your credit. 

To maximize the benefits that come with using a secured card:

  • Make sure to use the card selectively: Try to keep your purchases minimal by aiming for only 1-2 per month.
  • Steer clear of interest rates: Avoid interest rates by paying the full amount of your balance every month a few days before the due date. When you are late on your payments or don’t pay the full balance, you accrue interest, and interest rates on secured cards tend to be much higher.
  • Upgrade to an unsecured card: Once your credit score raises, you can transition over to an unsecured card. Talk to your credit card issuer about upgrading or see about applying through a new credit card company. 

Best secured credit cards

When it comes to secured credit cards, there are several different credit card companies to choose from. Here is a list of some of the leading secured credit cards:

  • Capital One Secured MasterCard: With this card, you don’t have to pay an annual fee, and your security deposit doesn’t have to equal your limit. Capital One’s secured card allows you to get a $200 limit for a down payment as low as $49. This is because they allow you to make payments on your deposit before giving you access to the card. If you are able to pay your first five payments in a timely manner, you may be rewarded with a higher credit limit. Activity on the card regularly gets reported to the three major credit bureaus. This card is a little bit higher to qualify for than other secured cards. For example, you usually won’t qualify unless you have a checking or savings account or if your rent and monthly income are almost the same amount. 
  • Discover it Secured: The best thing about this card is that it does not require you pay an annual fee and you can earn cash back. This card offers rewards: 2% cash back on up to $1,000 of spending on gas and dining, while you’ll get 1% back on all other types of spending each quarter. This card helps you build credit with the three major credit bureaus and after 8 months, your account will be evaluated for an upgrade.
  • OpenSky Secured Visa Credit Card: This card does require that you pay an annual fee of $35, but it’s still a good one because it doesn’t require a credit check. Your deposit is refundable, and it’s easy to build credit fast as this company reports credit card activity to the three major credit bureaus. 
  • DCU Visa Platinum Secured Credit Card: With this card, you don’t have to pay an annual fee or a balance transfer fee. and the Annual Percentage Rate (APR) is only 13.75% and variable, which is significantly lower than most other secured credit card companies. Just like with most other secured credit cards, you must put down a deposit but the cool thing about this card is that there is no limit on how much you can put down. This means that your monthly credit limit is up to you!
  • Citi Secured Mastercard: This card does not require you to pay an annual fee and it reports regularly to all three major credit bureaus, so it’s an excellent choice if your goal is to build credit. This card offers Flexible Payment Due Dates, so you get to choose whether you make your payments toward the beginning, end or middle of each month. This card is best for people who are building their credit rather than first time users or people trying to “rebuild” credit. 
  • Credit Builder Secured Visa Credit Card: This card does come with a $35 annual fee, but it also allows you to raise your credit limit by adding funds to your deposit in increments of $50. This is a great feature as most credit card companies make you apply for a higher limit or won’t allow you to raise it at all. All activity on the card gets reported to the three major credit bureaus, you get to choose your payment date, and you earn interest on savings. 
  • Green Dot primor Visa Gold Secured Credit Card: This card has an annual fee, but it has the lowest interest rate on this list. This makes it a great option for people who have bad credit and are trying to rebuild it. Another benefit of this card is that there are no penalty fees for being late on your payments, and while its always good to pay your bills on time, you’ll get hit less hard than with most other cards. 
  • Navy Federal Credit Union nRewards Secured Credit Card: This card is recommended for people who are in the military. You do not have to pay an annual fee, and there is no fussy application process. There is no balance transfer fee and after only 6 months of responsible use, your card will be considered for an upgrade. 
  • Harley-Davidson Visa Card: This card does not require you to pay an annual fee and has a maximum credit limit of $5,000. Another benefit of this card is that it comes with a rewards program that allows you to obtain 1 reward point per dollar that you spend. You can sign up for online banking and automatic bill pay, which helps you to be a responsible credit user. For bikers, you can even earn a $25 gift card for using 2,500 points. 

Final Thoughts

Whether you’re in a rut with your credit or you’re a credit rookie, a secured card could be a useful tool to help you establish a healthy credit score. Most major credit card companies report to the three major credit bureaus, which means you’ll be able to improve your credit score fast. No matter what your current financial situation is, there is a secured credit card for you. When looking for the best secured card, remember to read the fine print and see which pros and cons matter to you the most. 

After using your secured credit card responsibly, you should be able to upgrade to an unsecured credit card user in no time.