Secured Credit Cards: What Is a Secured Credit Card?

Many people want to achieve the perfect credit score or build some in case they don’t have any, but don’t know different ways for doing so. That’s when knowing about these credit cards is important. But what are secured credit cards and how do they work?   

A secured credit card is a type of card that requires you to put money into an account first before you start using it. The deposit acts as collateral for the credit card and can take many forms such as a savings account, a certificate of deposit, or a money market account.   

This is why secured credit cards are a way to build or rebuild your credit score. Since the money is already there even if you miss your monthly bill there is something the lender can take to cover it.  

They are a great method that can help you establish or reestablish good habits like making payments on time and keeping low balances, which are key for a good financial future.   

There are many banks offering secured credit cards and the amount of money required to open an account varies depending on the amount of credit you’re granted by the lender.   

Additionally, some issuers offer different types of secured cards with different amounts available depending on how much collateral someone has deposited into their account. And some may even allow consumers to make deposits after opening an account.   

Let’s now take a more in-depth look at all the ins and outs of these cards so that once you get to decide whether you need them or not you can also get the best outcome possible.  

What Are Secured Credit Cards?

They are a special type of credit card that requires a security deposit. Secured credit cards can be used for improving bad credit or establishing good scores if that is something you need for achieving financial freedom.   

In case you have no credit at all, but plan on taking a bigger loan in the near future, deciding on these cards can be helpful in starting this journey off on the right foot.  

Many lenders will be willing to offer borrowers secured cards with no credit check so it can be fairly easy to get them.  

But before you apply for one, you should know that secured cards aren’t the same thing as unsecured cards and this is a distinction you’ll need to make because there are some important differences in how they work and what they’re best suited for.  

How Do Secured Credit Cards Work?

Now that we got familiar with what these cards are and what they can offer, let’s answer the next question- how do secured credit cards work?   

These cards are issued by the most well-known credit card companies and banks. Similarly to a regular credit card, you first have to go through an application process. Applying for secured credit cards is generally easier than for unsecured so they are not hard to get at all.  

This is because with unsecured cards banks are taking a bigger risk and if you halt your payments there isn’t something they can easily take to cover their losses. So, to minimize these risk factors they will perform a more extensive check to see if you are a good candidate. 

Once you get your secured card, you can use it for things like buying groceries or other everyday expenses.   

Just like any other kind of card out there, secured ones have their own set of fees and rules to follow. Before applying, make sure you know all about the terms of your card so that you’re not surprised by any hidden costs when it comes time to pay your bill next month.  

Secured vs. Unsecured Credit Cards: The Difference

When deciding which card to get the difference between secured and unsecured types is an important one to know.  

As we already mentioned, secured credit cards are backed by a cash deposit. So, if you fail to make payments on them, the bank can take your deposit and use it for payment instead of continuing to send you bills.   

Unsecured credit cards do not require any kind of deposit. This makes them riskier than secured ones from the banks’ perspective because they may have trouble seizing assets in case of default.   

Some people may get unsecured cards just because they don’t have enough money saved up for a security deposit, but if that isn’t the case for you consider getting a secured credit card that will offer you many reward points and higher limits.  

Here are some options for the best secured credit cards available now:  

• Citi® Secured Mastercard®- This one has no annual fee and helps build your credit history with monthly reporting to all 3 major credit bureaus.  

• OpenSky® Secured Credit Visa® Card- There is no credit check and has an 85% average approval rate so it is quite easy to get.  

• Discover it® Secured Credit Card- For this one there is no credit score required to apply and also no annual fee. You could also earn cash back with responsible use.  

• Capital One Platinum Secured Credit Card- There are no annual or hidden fees and you can also see if you’re approved in just a few seconds.  

Secured Credit Cards

We already talked about these cards and how they require a deposit in order for you to get one. However, this deposit can vary a lot depending on the card issuer you choose. As a general rule, it is typically equal to the amount of the maximum credit limit.  

This deposit acts as collateral for your account and provides you with a line of credit that you can use to make purchases and meet other financial obligations.  

The key difference between secured accounts and other types of checking or savings accounts is that there’s no risk if you don’t pay off your bill in full every month because the bank has your money in reserve anyway. But if you do choose to pay off more than just minimum payments each month, then it will help lower interest rates and improve your score over time.  

Secured cards are an excellent option for people who may not have an established history of applying for loans or making large purchases using their own funds but would still like some sort of control over their finances.  

Unsecured Credit Cards

Unsecured credit cards are the most common type, which require no deposit at all.  

Plus side of these cards is that if you were ever to miss a payment or two, there is no asset put down that the bank can repossess. The downside is that they tend to have higher interest rates than their secured counterparts because they’re more risky investments for banks.  

In order to qualify for them you will need a good credit score because your credit reports and scores give lenders insight into your activity and current credit situation.  

Much like secured cards they also have many benefits to offer to their users.

How to Get Secured Credit Cards

Secured cards are a good choice if you have bad credit and have some money set aside that can be used as your collateral. Depending on the specific card you choose it can take more or less time to get approved, but once you do, you are on the good path to rebuilding your credit history and improving your overall score.  

Here is how to apply for a secured card:  

• Apply online at the website of the bank or credit union offering the card. This is usually easy and quick. Most banks that provide these types of cards will let you apply online from their websites.  

• Call the customer service number on the back of your existing debit or savings account card (if there isn’t one, just call the bank). If necessary, explain what type of account you want and ask whether they offer that kind or something similar.  

In case you are unsure whether you will be approved for one or not we suggest you try to get pre-approved for many secured credit cards and later on just choose the best one that fits your needs.  

Do Secured Credit Cards Build Credit?

Secured cards actually do build credit in the best way possible.   

They’re also useful if your FICO score isn’t as good as you want it to be. However, the amount of available credit is usually limited by the amount of money that has been deposited into the account.  

A secured card can be used as good proof of financial responsibility and an emergency backup in case things go wrong with other accounts.   

Depending on your circumstances, there may be better ways to build or repair your credit than applying for a secured card. For example, if you have plenty of money saved up but need help paying down debt faster than possible with an unsecured card or line of credit you can try applying for an unsecured personal loan. This could get you access to more cash than using a secured card would allow without having any collateral tied up in it at all (other than possibly just getting approved based on income).  

How to Use Your Secured Credit Card to Build Credit

There are many ways to use your secured credit card for this purpose. The first step is to actually know your current score. You can do this by checking your free annual credit reports from each of the three major reporting agencies: Equifax, Experian, and TransUnion.  

Next, keep your account open and active as long as possible. This allows you time for late payments or other negative marks on your account to fall off of your report and gives banks and lenders more information about how responsible you are with managing money.   

If it’s convenient for you and fits into your budget plans for the next few years, consider applying for some type of unsecured loan to increase the amount available in savings each month, as this will raise the limit on your secured card and ultimately lower your utilization ratio. 

Bottom Line

The bottom line is that secured credit cards are a great way to build up your credit score and get into the habit of using credit responsibly. They’re also a useful tool for people who have bad or no credit history. But in case you have good or even excellent credit, an unsecured card might be better suited for your needs.  

While we cannot tell you which card will best suit your personal situation and financial goals, we gave you a good in-depth explanation of everything you must know on this topic. Consider hiring an experienced financial advisor if you need any additional help.