Nov 1, 2022
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Imagine the first time you rode a bike for real. You were probably thrilled when you sailed down the street on two wheels. But before that, you probably needed training wheels to help steady your balance so you wouldn’t stumble and fall.
A secured credit card is like training wheels for your credit score.
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Here's the low-down on how a secured credit card works and how to determine if it's right for you.
Secured credit card basics
A secured credit card is a low-limit credit card that requires a deposit.
Let’s say your deposit is $300. That makes your credit limit for that billing cycle $300, too. Try to spend any more than that, and your card will be declined.
And yes, a secured card is a real credit card. Unlike a debit card or prepaid card, a secured credit card has no cash balance and it requires you to be diligent about making your monthly payments in full during each billing cycle.
Secured credit cards offer a low-pressure way to build credit. The low credit limit keeps you from going overboard on your spending, and helps you get into the habit of paying off your card in full every month.
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How does a secured credit card work?
The credit card is "secured" by your deposit, which serves as collateral so the card issuer has something to fall back on in case you can't make your monthly payment on time.
Card issuers have different minimum deposit requirements, but they range from around $50 up to a few hundred dollars.
If you don’t have a ton of cash on hand, you'll find some companies will allow you to pay the deposit in chunks.
How to get a secured credit card
You obtain a secured credit card by applying with a card issuer. Compare offers to find a card with attractive terms, like no annual fee and a minimum deposit amount that works for you.
The card issuer will also ask for personal information including:
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- Social Security number
- Employment details
- Income amount
Of course, you'll also be asekd how much money you'd like to put on deposit.
Once you are approved, you will receive your card in the mail within two to three weeks. You'll be able to use it as you would any other credit card; secured cards are universally accepted.
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Can a card issuer turn me down?
Not everyone will be approved for a secured credit card. The credit card issuer looks at certain factors — such as whether you have a bank account and a regular income.
Alternative to a secured credit card
If you don't think you'll be approved for a secured credit card, you might consider a credit-building loan. Austin Capital Bank offers a product called Credit Strong to help you build your credit without a credit card. When you open a Credit Strong account, they immediately give you a loan and place the funds in a savings account in your name. The savings account funds are locked to secure the loan. Your payments of principal and interest are then credited towards the lock on your savings. When your loan is repaid in full, the lock is removed, and you will have built both credit and savings.
That will demonstrate to a credit card company that you know how to handle your money.
Secured vs. unsecured credit cards
While secured cards are not mandatory probation for obtaining a credit card, they can help people who are just starting to build credit. Those whose credit is currently in need of a boost might also consider using a secured credit card while they get their finances back on track.
But for your very first credit card, you might feel comfortable choosing an unsecured credit card, which does not require a cash deposit and usually offers better benefits, especially credit card rewards.
However, the absence of a deposit means there’s no safety net should you default on your payments or pay only the minimums.
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If you don’t pay your balance on time with an unsecured credit card, expect to pay interest charges and expect your credit to take a hit, putting you back at square one.
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Using a secured credit card to build credit
Yes — you can raise your score in as little as 30 days with a secured credit card. Using the card properly can help you establish credit history, repair damaged credit, and improve your overall credit score.
Plenty of card issuers offer you the opportunity to access your credit score on a monthly basis, allowing you to monitor your progress and make changes where appropriate.
Your card issuer will likely be sharing your repayment history with the three major credit bureaus (Experian, Equifax and TransUnion), so keep your credit in good health by making sure you don't spend more than you can pay off each month.
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Be sure to ask if your card issuer reports to the "Big Three." If not, then you may want to shop around for a different secured card, because if the bureaus won't know what a great job you're doing with your card, then what's the point?
What happens if I can't pay my bill on time?
If you hit a rough patch and are unable to make your secured credit card payment on time, your credit card issuer has your deposit as a fallback and can take the money from there. But you don't get off scot-free.
While it depends on the credit card company, in many cases failure to pay your bill after 30 days will result in a late fee and a hit to your credit score. You may also lose your entitlement to rewards and any other card benefits, and your interest rate can go up.
Commit yourself to paying your bill on time and in full every month.
Who should get a secured credit card?
If you need a credit card to help you juggle expenses but don't yet qualify for an unsecured card, a secured card may be the best option for you. A secured credit card allows you to have some financial freedom while working toward better credit. Compare secured credit cards and choose the best option for you.
Paying off your card each month establishes a pattern of reliability, showing banks and creditors that you're a low-risk candidate for an unsecured credit card. Later on, it shows you're more than capable of paying off a loan or a mortgage.
But a secured credit card isn't just for people with no credit. It's also a great rehabilitation tool for people with poor credit, allowing them to slowly — but surely — rebuild credit that's in the gutter, even while paying off debt.
Is a secured credit card right for me?
Keep in mind that a secured credit card really is like training wheels for your credit. That means your spending abilities will be strictly limited on your secured card.
In other words, if you’re looking for a card with a high credit limit, then a secured card is definitely not for you.
Also, keep in mind that the benefits are usually a fraction of those offered on unsecured credit cards. If you want generous travel rewards or cash-back offers, you likely won't find them with a secured credit card.
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Sarah Cunnane was formerly a staff writer at MoneyWise. She is a writing and marketing professional with an Honors Bachelor's degree in English and Creative Writing from the University of Toronto.
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