What Is a Secured Credit Card and How Does It Build Credit?
If you have no credit history, it can be hard to do things like get a mortgage, find affordable car loans or even rent a bigger apartment.
The easiest place to start building good credit is with a credit card. But how do you qualify for a credit card with no credit?
That’s a problem many consumers face, as an estimated 26 million people in the United States are considered “credit invisible” — meaning they don’t have any credit record — and another 19 million Americans are considered “unscoreable” because their credit information is insufficient or outdated, according to the Consumer Financial Protection Bureau.
If you’re among that group — or you have poor credit in need of rebuilding — a secured credit card may be the route for you.
What Is a Secured Credit Card?
A secured credit card functions much like a traditional credit card, except with one big exception. A secured credit card’s credit limit is based on a refundable security deposit rather than your credit worthiness.
How Secured Credit Cards Work
When you apply for a secured credit card, you’ll put an initial deposit down as collateral, and the bank gives you a credit card with a limit that’s usually equal to your cash deposit. The bank essentially uses your security deposit as your line of credit.
So if you put $200 down, your credit line on most secured credit cards will be $200.
Keep in mind that once you deposit the money, you generally can’t get that cash back until you cancel the card, so make sure you don’t need the money any time soon.
How Does a Secured Credit Card Build Credit?
Secured credit cards can be a great way to rebuild if you have bad credit or no credit at all.
The point of getting a secured credit card is to help create a positive payment history or good credit, which in turn raises your credit score.
The credit card issuer reports your activity to at least one of the major credit bureaus — TransUnion, Experian and Equifax — which is used to calculate a credit score, i.e. your VantageScore or FICO score.
So after using and paying your card off for a while, your credit history and credit score will grow.
From No Credit Score to 700 in Eight Months
When Matthew Ramachandran was 18, he put a $400 security deposit on a Bank of America secured credit card. It helped him grow his nonexistent credit history to a 700 credit score in eight months.
Asked about his tips for building credit using secured credit cards, Ramachandran said, “I always used less than 30% of my credit limit.”
After hitting that 700 credit score, he canceled the secured card and got approved for an unsecured Chase Visa with travel rewards.
Now he makes business purchases with unsecured cards to get travel rewards. He even stayed at the Ritz-Carlton in Hawaii for five nights with his points.
All thanks to that first secured credit card.
You can also use an app to start building your credit history. Credit-building apps use payments on small loans or subscriptions to create good credit.
Features to Look for in a Secured Credit Card
Many credit card companies offer secured cards — but not all secured credit cards are created equal.
When shopping for a secured credit card, you’ll want to look for:
- No or low annual fee. Secured credit cards may come with an annual fee. Look for an annual fee of $35 or less. No annual fee is even better.
- Low APR. APR stands for annual percentage rate, and it’s basically the interest rate and fees you’ll pay to borrow money if you carry a balance. Obviously, the lower the better.
- Reports to all three major credit bureaus. You’ll only build credit history if your card issuer reports your payment history to the credit bureaus. Look for a card that reports each month to all three bureaus: Equifax, Experian and Transunion.
- Option to convert to an unsecured card. Many credit card issuers let you convert your secured card to an unsecured card after six or seven months. This option is better than qualifying for a new unsecured card. Why? The age of credit determines 15% of your credit score. If you get a new unsecured credit card and close your secured card to get your deposit back, your credit score will temporarily go down.
How to Get a Secured Credit Card
You can visit a bank or apply online for a secured credit card. If you’re a credit union member, you may want to check there first because they often offer lower interest rates and waive annual fees.
To apply, you’ll need to provide some personal information, including your Social Security number and your employment status and income. Most, but not all, will also require you to have a bank account.
Applying for a credit card usually results in a hard inquiry to your credit report. If you have a credit score, this will probably cause your score to drop by a few points. Don’t worry, though: It’s totally normal, and it’s also temporary.
If you have a bankruptcy on your record or a history of missed payments, the bank may not approve you for a secured credit card. If you’re denied, you have a legal right to know why. You can contact the card issuer for that information.
Ease into credit cards by asking a financially responsible family member to add you as an authorized user.
Secured Credit Cards vs. Unsecured Credit Cards
The biggest difference between these two types of cards is that secured credit cards generally require a minimum security deposit while an unsecured credit card does not. For this reason, your credit limit is much lower on a secured card than an unsecured card.
Aside from the cash deposit and low credit limit, secured credit cards function much like traditional credit cards. You make purchases and pay off your monthly balance before it’s due.
Unlike secured cards, you don’t need a security deposit for an unsecured card. You will, however, need a good-to-excellent credit score to qualify.
An unsecured credit card often features better perks and rewards, lower fees and lower interest rates.
Unsecured Credit Cards Vs. Secured Credit Cards
|Unsecured Credit Card||Secured Credit Card|
|Minimum credit score required||Usually 670+||Available for scores under 579|
|Reports to credit bureaus||Yes||Yes|
|Annual fee?||Sometimes||Usually not|
|Average APR||At least 17%||Usually at least 25%|
|Rewards available?||Yes, with rewards credit cards||Sometimes|
|Credit limit||Varies; high credit scores usually = higher limits||Usually the same as your deposit|
If you’re getting offers, make sure they’re for a secured credit card, not a prepaid debit card. Prepaid cards don’t send your payment history to credit reporting agencies, so you won’t build credit.
3 Steps to Keep Good Credit With a Secured Credit Card
A secured credit card charges interest, so you still need to make monthly payments on time and in full to avoid fees.
To make your secured credit card work in your credit score’s favor, you need to know what a credit score is and follow some simple rules:
- Pay your bill in full by the due date every month. Only making the minimum payment will incur interest — and interest rates are really high on secured cards. Best to pay it off in full.
- Maintain a low balance. Keep your credit utilization rate, or the percentage of open credit that you’re using, below 30% of your credit limit.
- Don’t open multiple cards at one time. Opening too many credit cards at once can ding your score.
How to Build Credit with a Secured Credit Card?
If you’re using a secured credit card to build credit–which we recommend–the main thing to do is pay off your balance each month. Every time you carry a balance, you risk hurting your credit score. If you struggle to pay off your card, here are a few pointers to help you succeed:
1. Automate Your Payment
If you have trouble remembering to make payments, consider setting up automatic payments for at least the monthly minimum to be drafted from your bank account. You can usually do this online or by calling your credit issuer.
However, if you frequently overdraft or you often have just a few dollars left in your bank account as payday approaches, this isn’t a good option. A better move is to set up text alerts to remind yourself when the payment is due.
2. Charge One Small Expense Per Month
Start building your history by charging one small necessary purchase each month. Small is key here. You never want your credit utilization ratio, or the percentage of open credit that you’re using, to go over 30%.
If possible, keep it below 10%. Credit utilization ratio determines 30% of your credit score. Because you don’t know when your issuer will report your activity to the bureaus each month, follow these guidelines even if you’re sure you can pay off the balance in full each month.
3. Ignore Rewards Points
Some companies offer credit rewards points even for secured cards. But while you’re building credit, ignore them. Each point is only worth about 1 cent. If you let credit rewards influence your spending, you’ll quickly erode any benefits you earned.
After you have at least six months of on-time payments, you should see improvement to your credit score. Within a year, you’ll probably qualify for an unsecured credit card. Celebrate your newfound creditworthiness by asking your card issuer if you can convert your line of credit to an unsecured line.
Frequently Asked Questions (FAQs)
How Much Will a Secured Credit Card Help My Credit Score?
There’s no hard-and-fast rule on how to use a secured credit card to build credit. The key is to keep usage low and pay off your balance in full every month.
After you have at least six months of on-time payments, your credit score should go up. Within a year or less, you can probably qualify for an unsecured credit card.
Are Secured Credit Card Deposits Refundable?
If you close your secured credit card account in good standing (no outstanding balances), you’ll get your deposit back. You’ll also get your money back if you upgrade to an unsecured credit card from the same credit card issuer.
Can You Be Denied for a Secured Credit Card?
You’re less likely to be denied a secured card than a traditional credit card because you’re putting down a security deposit. That’s why secured cards are a good option if you have limited credit history — or no credit history at all.
But there are still a number of reasons you could be denied for a secured card, like a recent bankruptcy filing, a tax lien, insufficient income or an extremely low credit score.
If you’re denied, the credit card company will need to tell you why in writing. You’re entitled to a copy of the credit report they used to make their decision.
If you find that the card issuer rejected your application due to an error on your credit report, you can — and should — dispute the error with the credit bureaus. Once the issue is resolved, you can contact the card issuer to reapply.
What Should I Do If I’m Denied a Secured Credit Card?
You might want to apply for a card that doesn’t require a credit check, like OpenSky. (One drawback: It’s one of only a handful of secured cards that charges an annual fee).
Community banks and credit unions may also have credit-building options, like a credit-builder loan.
Rachel Christian is a Certified Educator in Personal Finance and a senior writer for Codetic. Jen Smith, a former staff writer, and freelancer Whitney Hansen contributed.