Takeaways
- Secured credit cards are credit cards that have a cash security deposit.
- Secured credit card deposits range from $300-500 and act as your credit limit.
- Secured credit cards help subprime borrowers build their credit score over time.
- Credit card companies can convert secured into unsecured credit cards.
- Secured credit cards function like unsecured ones but have lower credit limits, higher APYs, more fees, and require cash or property deposits.
What Is a Secured Credit Card?
A secured credit card is a type of credit card that requires the cardholder to deposit cash or property. This deposit is used as collateral, which serves as a financial cushion for the credit limit.
Secured credit card providers require a deposit from cardholders because these cards are often issued to folks with poor credit reports or a demonstrated history of failing to meet on-time payments. With a security deposit at risk, cardholders are incentivized to improve their credit utilization, lowering the risk assumed by the credit card issuer.
Secured credit cards are one of the most accessible options for individuals with no credit or poor credit to begin building a credit history. The secured deposit acts as a financial stopgap, and however much you use as a security deposit generally matches your credit limit. Some credit card issuers will offer a credit limit above your security deposit after a demonstrated ability to manage your debt.
Secured credit cards can be used exactly like conventional credit cards. They allow you to make purchases, pay bills, and build a good credit history through responsible use. They can be instrumental if you are trying to establish your credit or repair it from damage.
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How Secured Credit Cards Work
Secured credit cards work by requiring the cardholder to put down an initial security deposit to guarantee the credit limit allowed to be used on the card. The deposit is the collateral for the credit limit and generally ranges from $200 to $500 (sometimes more). The secured credit card issuer holds the deposit if you default on your debt. Because secured credit cards are issued to subprime borrowers, requiring collateral allows you to build up credit with guardrails.
Unsecured credit cards, however, are not backed by collateral, which is why they have such high interest rates. Credit card companies issue new cards to applicants based on their credit report, debt-to-income ratio, and history of payment. High credit score borrowers command lower interest rates and better rewards. Unsecured credit cards don’t have much course of action aside from sending your unpaid credit card bills to collections or dinging your credit report.
Smart Tip:
Getting your first credit score takes 3 to 6 months of credit activity.[1] Plan on using an unsecured credit card accordingly and manage your use of it carefully.
Advantages of Secured Credit Cards
Secured credit cards can be an excellent financial tool. Here are several advantages to keep in mind before applying for a secured credit card:
- Rebuilding Credit: First, credit cards are an excellent tool for someone with poor or no credit since they create an opportunity to rebuild credit. Using the card responsibly, including making on-time payments and keeping balances low, can demonstrate good credit behavior to the credit bureaus and potential future lenders.
- Credit Limits: Secured credit cards are also a safer way for consumers to manage credit since the required deposit limits your eventual spending and lowers the risk of rapid debt generation.
- Credit Card “Lite”: Many secured cards have features nearly identical to similar unsecured cards, such as online account management, fraud protection, and even rewards programs. These features allow users to get used to unsecured credit card features while building smart money habits.
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Disadvantages of Secured Credit Cards
Secured cards do come with some significant drawbacks that you should consider. Here are several cons to taking a secured credit card:
- Higher Interest Rates: Unsecured credit cards tend to have higher annual percentage rates (APY) and fees than similar cards because they are issued to borrowers with poor credit histories. According to a recent survey, the average APY for unsecured credit cards in the second quarter of 2024 was 22.95%.[2] Higher interest rates compensate credit card companies for the risk of lending to unproven borrowers.
- Security Deposit: The need to provide a security deposit can also be a significant barrier to some consumers. Even with these limitations, secured credit cards can be a valuable financial tool if you are trying to establish or repair your credit history.
- Other Credit Building Opportunities: Factors like your credit utilization, credit limit, debt-to-income ratio, and credit mix affect your credit report. Applying for different types of loans, like an auto or personal loan, could also improve your credit score. Before taking out new debt, you should ensure your budget can handle the additional monthly payments.
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How Do Deposits Work?
You might be wondering how the deposit for a secured credit card works and how it acts as collateral. When you open a secured credit card account, you transfer a cash deposit to the account (or, in some cases, physical goods like a watch, jewelry, or other valuables). Your deposit is held in a separate account and refunded if you close your account in good standing or upgrade to an unsecured credit card.
Your deposit is used to set your credit limit. For example, if you deposit $300 for a secured credit card, you will have a credit limit of $300. Depending on your credit history, banks and card issuers may offer slightly higher credit limits than the deposit amount based on the specifics of your credit profile. If you manage your credit responsibly, make on-time payments, and avoid carrying a balance, you can boost your credit score quickly.
Ultimately, your deposit covers any potential unpaid credit card bills. If you decide to close your secured credit card, however, your deposit, less any outstanding bills, will be returned to you. Alternatively, make regular on-time payments and boost your credit score. Many credit card companies will allow you to convert the secured card to an unsecured card and return your deposit.
Do Secured Credit Cards Build Credit?
In short, yes. Your secured credit card will help you build or rehabilitate your credit. When you use a secured credit card responsibly, your payment history and credit usage are reported to the major credit bureaus: TransUnion, Equifax, and Experian.
Your card issuer reports your credit information to the credit bureaus each month, and this information is added to your credit report. This process slowly improves your credit score. Read more about how to boost your credit score quickly by 100 points.
One of the biggest steps you can take to build your credit score is making your payments on time. On-time payments account for a major portion of your FICO Score and VantageScore, so be sure all your payments are on time or early.
Also, keep an eye on your credit utilization, which measures how much of your available credit you are using. Credit utilization is your current credit balance divided by your available credit and is typically expressed as a percentage. Personal finance experts advocate keeping your utilization under 30%.
Smart Summary
Secured credit cards are a type of credit card that lets borrowers with poor credit rebuild their credit profile. These credit cards require a deposit, which credit card companies keep as collateral against your line of credit. Subprime borrowers can use a secured credit card as a tool to climb their way up the credit score ladder one on-time payment at a time. If effectively used, you can convert your secured credit card into an unsecured credit card.
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Frequently Asked Questions
In the second quarter of 2024, the average APY for an unsecured credit card was 22.95%. This is much higher than the APY for someone with excellent credit trying to open a secured credit, which was 18.20%.[2]
On average, it takes three to six months of credit history for your credit score to be generated.[1] During that time, manage how much you use your credit card. Make on-time payments, budget your expenses, and pay your monthly credit card bill in full. These actions will help improve your credit score over time.
Yes, especially for borrowers looking to enhance poor credit scores. Although there are other alternatives for increasing your credit score, applying for an unsecured credit card could be the exact step you need to set you on the right financial path to get your personal finances in order.
You can close your secured credit card at any time. Of course, if you have an outstanding balance, you will need to pay that off. Alternatively, you can use your deposit to offset your balance. If you used your secured credit card well, you could transition to an unsecured credit card.
(1) Experian. How Long Does it Take to Get a Credit Score After Opening an Account. Last Accessed January 14, 2025.
(2) WalletHub. Credit Card Landscape Report. Last Accessed January 14, 2025.
