What is a Secured Credit Card? A Guide to Deposit-Backed Credit Options

What’s the first thing that comes to mind when you hear the word “secured?” Maybe it’s the warm and fuzzies when curling up by the fireside. Or is it a more literal version, such as locks turning on safety deposit boxes? 

Whatever images the word conjures for you, “secured” has a particular meaning in the credit card world, and that’s exactly what I’ll dive into today.

A secured credit card is backed by an upfront deposit that you must pay before you receive the card. The deposit becomes your collateral and is usually equal to your credit limit. 

If you’re looking to build or rebuild your credit, secured cards can be an important credit tool. However, they have their pros and cons, as I’ll explain.

Stuffing your brain with knowledge about secured credit cards can give you an edge when building or rebuilding your credit. These cards give you an opportunity to show your financial discipline, even when your credit history has some serious scars. 

Whether you are new to credit or looking to work your way back from a rough patch, understanding how secured credit cards work can help you to make smart decisions that will set you on the right path.

Deposits Are Collateral 

You have to make an initial cash deposit to obtain a secured credit card. This deposit secures the line of credit — it serves as your collateral for the issuer granting the card. The usual practice is for your credit limit to match whatever amount you deposit, so that a $500 deposit pretty much becomes your spending ceiling.

These allow you to put down a smaller deposit than your credit limit, giving your budget a little wiggle room. For example, the Capital One Platinum Secured Credit Card lets some applicants put down $49 and get a $200 limit.

But don’t think of a deposit as a prepaid bill. Your monthly payments work just like they do with any other credit card: Your deposit is drawn on only if you miss a payment or default on your account. 

The good news is, as long as you play by the rules and keep your account in good standing, you’ll get your deposit back upon account closure or when upgraded to an unsecured card.

Your refund can sometimes feel like an added little bonus for managing your credit responsibly. Let’s be real, who doesn’t enjoy getting money back into their pocket?

Eligibility and Application Process

A positive point about secured credit cards is that they are generally easier to get. Lenders feel much more at ease issuing secured credit because they have that deposit in place to protect against losses. Therefore, if you have had trouble being approved in the past, a secured card may be your ticket back into action.

Secured credit cards are not exclusively for people with poor credit. They are a great tool if you are just beginning your credit journey.

If you have not yet ventured into the world of credit, a secured card is a good place to make your debut.

Applying online for the secured card is pretty easy. You’ll need to provide some basic information, such as identification and proof of income — along with that all-important deposit. It’s up to the issuer whether it will perform a hard credit check. Some cards only do soft checks, which means they don’t impact your credit score (if you have one). 

Of course, if you are a credit newbie, you have no credit history to check, so the issuer may look at other sources to verify your Social Security number and other application data.

Once you’re approved and your deposit clears, you’re on your way to building or rebuilding your credit with every on-time payment. The card should arrive in the mail within a week to 10 days. Some cards may give you a virtual account number you can use for card-not-present transactions until the physical card arrives.

Interest Rates and Fees

While being somewhat more liberal on the approval side of things, some secured credit cards still tend to have a fairly high interest rate. But here’s the good news: Most secured cards actually charge less interest — sometimes much less — than other unsecured cards for people with poor credit.

In general, you won’t have to deal with any troublesome sign-up or monthly maintenance fees, and annual fees tend to be quite low. In fact, there are several secured cards out there that won’t charge you any annual fee, leaving more of your money right where it should be — in your wallet. 

Put simply, secured cards offer the promise of a helpful financial tool without adding all the baggage of extra fees. Doesn’t that sound like what you’re looking for?

With credit cards, you gotta know with whom you’re dealing. Secured and unsecured — maybe those terms sound intimidating, but the difference between them is common sense anyone can comprehend. Pick the right one, and you’re on your way to building credit without breaking the bank. Select the wrong one, and you might be throwing money down a well.

Comparison of Traits

Now, I’ll lay out how these two card types perform against each other in a head-to-head matchup. It’s all in the following table:

If your credit is in the dumps, save yourself a lot of hassle and get a low-cost secured card instead of an unsecured one with huge fees. Remember, you can get the deposit back, but those unsecured card fees are never coming back.

Before parachuting into the world of secured credit cards, you need to know the good and bad. Knowing the pros and cons will save you from making a decision that can potentially lead to regret later.

Benefits: 

• Building or Rebuilding Credit: One major reason to get yourself a secured card is to build or rebuild your credit. Whether your credit’s been through the wringer or you’re just starting out, one of these cards can help you prove you’re responsible with money.
  
• Access to Credit for High-Risk Individuals: For those labeled as “high-risk” by the powers that be, a secured card may be the easiest way to get some credit. It’s your chance to prove that your word means something, even if your past wasn’t exactly shiny.
  
• May Omit Hard Credit Check: Some of these cards will not even bother with a hard credit check when you apply. This means your credit score will not suffer just because you’re trying to get your foot in the door.
  
• Helps Transition to Unsecured Credit: Another bonus is that once you’ve shown you can handle a secured card, you will likely get the chance to upgrade to an unsecured card. It’s not about graduating from the minors to the big leagues as much as getting your deposit back.

Drawbacks:

• Security Deposit: You can’t get around the need to put down a deposit to get started. That’s not always convenient when money is tight.
  
• Fees and Interest: Some secured cards can still be rather pricey. So you have to be careful, or you may just pay more than you originally bargained for.

• Rewards and Perks: The bonuses and perks attached to secured cards can be all over the map. Some of them have great deals; others, not so much.

Sure, some secured cards hit you with high costs or limited perks, but heck, many others don’t. Fortunately, your security deposit is 100% refundable, so long as you keep everything on the straight and narrow.

Picking out the right secured credit card is as important as picking the right pair of boots. You want something that fits your needs and won’t leave you with blisters down the road. 

Choose wisely, and it’s full steam ahead to building your credit without wasting money on a whole bunch of extra costs. Select the wrong card, and you just might find yourself paying too much or losing out on better opportunities.

Evaluate Fees and Terms

In terms of fees and terms, you should compare secured cards just as you would the prices of gas at your local stations. Take a good peek at the annual fees, interest rates, and other associated charges with the card. You don’t want to be paying a premium just to keep that card in your wallet.

The ideal situation is always to pay off your balance each month, but when carrying a balance can’t be avoided, a low-rate card comes in handy. The following chart illustrates that a lot is at stake when it comes to APR. In other words, the APR determines both how long it will take to pay off a balance and how much it will cost.

APR Impact on a $500 Credit Card Balance With a $50 Monthly Payment

Of course, if you never carry a balance, the card’s APR may not be as important as its other features. In most cases, a no-annual-fee card is preferable to one that charges a fee — unless you stand to earn enough in rewards (and then some) to account for the cost.

In any event, look for a card with reasonable fees and terms that won’t take advantage of you. There are cards out there with fees so low they’ll make you giddy, while others will have you paying more than you should. So keep your eyes peeled for the ones that treat you right.

Here’s a hint: go online and find the secured cards with the lowest APRs. CardRates.com has articles that will give you the facts you need to make a smart choice. The lower the APR, the less interest you’ll pay if you carry a balance, meaning the money stays in your pocket and not with the credit card company.

Just make sure to read the fine print as well. Sometimes sneaky fees pop up in the details, and if you don’t catch ’em, they will catch you. A little extra time spent studying the terms could really save you a heap of trouble later on.

Assess Credit Reporting Practices

You want to be sure that in your quest to rebuild or build credit, your card issuer does, in fact, report to all three major credit bureaus (Experian, Equifax, and Transunion). That’s like having a good word put in with all the folks that matter — the key to showing the world you’re money wise.

Regular reporting is like a steady drip of water. It’s slow initially, but over time, it can fill up a big bucket. Every on-time payment you make gets reported, and it builds your credit score drop by drop.

But remember, reporting credit can cut both ways. It’s all good when you’re building credit, but if you make a mistake and don’t get a payment in on time, that gets reported, too. And that can tear your score to pieces faster than you can say “delinquent.” Well, actually, only after the payment is 30 days overdue.

Prepare to handle your card responsibly before you jump in. Healthy habits build strong credit, and strong credit is what will open doors for you in the future.

Consider Rewards and Other Features 

Not all secured cards are bare-boned. Some offer points or cash back rewards programs that sweeten the deal a bit. If you are going to be using the card anyway, why not earn a little something for your trouble?

Look for features such as free credit monitoring and educational tools that can help you make better decisions. Some cards come with these extras at no cost to give you a leg up in understanding and managing your credit. It’s like having a helpful neighbor who knows a thing or two about keeping your finances in order.

You’ll also want to hit the internet to check out the cards with the best rewards. Find one that fits your spending habits, and you’ll get a little extra bang for your buck. 

Our top-rated secured card with rewards is the Discover it® Secured Credit Card. It pays 2% cash back on select purchases up to a quarterly purchase threshold and offers new cardmembers a Cashback Match on all rewards posted in the first year.

Just remember, while rewards are nice, they shouldn’t be the only thing you consider. A credit card with great rewards but lousy terms is not worth the trouble. Balance benefits with costs, and you will end up with a card that is a good fit all around.

A secured credit card can be a faithful partner for developing or rebuilding your credit. It is a tool that proves you are responsible with money, and you will quickly be back on the road to regaining your credit health. 

By putting down a deposit and using the card wisely, you can show the credit bureaus that you really do have what it takes to handle credit. So, if you’re looking to get your credit back on track, a secured card may be the ticket to a first-class seat rather than economy.