What Is a Secured Credit Card and How Does It Work?

A secured credit card is a type of financing that requires a cash deposit. The security deposit you make serves as collateral for the account and reduces the credit card issuer’s risk when it loans you money. As a result, you may be able to qualify for a secured credit card even with credit challenges like a bad credit score or no established credit history.

If you’re trying to decide whether a secured credit card is right for you, it’s wise to learn how this financing option works and how it compares to other credit card options. You should also research the benefits and drawbacks of opening a secured credit card and understand how to manage your new account in a responsible manner if you decide to open one.

How does a secured credit card work?

When you apply for financing, like a credit card or loan, the lender will review your credit score and credit history to determine the risk of doing business with you. If you have no credit or bad credit, qualifying for credit cards, loans, and other types of credit can be difficult. Yet a secured credit card might be an option for you even in these situations.

When you open a secured credit card, you make a cash security deposit. The security deposit acts as a safeguard (aka collateral) to reduce the risk involved for the issuing bank. If you’re unable to repay the money you borrow with your secured credit card, the credit card issuer can take cash from your security deposit to recuperate most (if not all) of its losses.

The best secured credit cards give you an opportunity to establish credit history with the major credit bureaus—Equifax, TransUnion, and Experian. So, it’s important to confirm that any secured credit card you’re considering will report to all three credit bureaus before you apply for a new account. You’ll also need to manage your new secured credit card in a responsible manner with no late payments and a low credit card utilization rate if you hope for the account to improve your credit over time.

Secured credit card vs. unsecured credit card

In many ways, a secured credit card works like a traditional unsecured credit card. When a credit card issuer approves you for either type of credit card, your account will feature a credit limit against which you can borrow. This credit limit represents the maximum amount of money you can spend on your credit card at a given time.

As you repay the money you borrow (plus applicable interest and fees), you’ll free up more available credit to spend on your credit card again. You can repeat this process—borrowing and repaying debt—with both secured and unsecured credit cards as long as your account remains open and in good standing.

Of course, it’s common for secured credit cards to feature fewer rewards (if any), lower credit limits, higher APRs, etc. compared to the unsecured credit cards for good or excellent credit. But if you use a secured credit card in a responsible manner, it might help you build your credit so you can gain access to more attractive financing opportunities in the future.^[1]

Here are some of the key differences between secured and unsecured credit cards.

How does a security deposit work?

When you open a secured credit card, it’s common for the credit card issuer to ask you to make a cash security deposit. This deposit serves as collateral to secure the credit line attached to your account and protects the lender’s financial interests in case you default on your debt in the future.

Once you send the cash deposit to your new credit card issuer, it will hold those funds in a savings account or certificate of deposit. The amount of money you send your credit card issuer in the form of a security deposit typically equals the credit limit on your new secured credit card.^[2]

How much should you put down for a deposit on a secured credit card?

Credit card companies often let you choose the size of your security deposit (and thus the size of your credit limit) when you qualify for a new secured credit card. But there may be minimum and maximum credit limits that apply to secured credit cards, and these restrictions can impact your security deposit as well.

For example, if you qualify for a secured credit card from Discover, you can choose to send in a deposit anywhere between $200 and $2,500. Your credit limit will equal the security deposit you send to the card issuer. The maximum credit limit (up to $2500) will be determined by your income and ability to pay. Capital One, on the other hand, starts its credit limits on secured credit cards at $200. But if you qualify, you might only need to send in a $99 security deposit to receive a $200 credit limit.^[3][4]

The amount you put down for a security deposit is a personal decision. It doesn’t matter whether you have a $200 credit limit or a $2,000 credit limit if you always pay on time and keep your balance-to-limit ratio low. (However, it’s worth noting that it’s generally easier to max out a low-limit credit card compared to an account with a higher credit limit.)

Do you get your deposit back from a secured credit card?
The security deposit you make when you open a secured credit card is typically refundable. You should always get your deposit back as long as you don’t owe anything when you close your credit account. If you’re unsure about anything, you should review the terms of your credit card agreement for specific details about your account.

Your security deposit can not be used to make your monthly payments, so it’s important to always pay your account on time each month. You might also need to close your secured credit card to get your deposit back, depending on the terms of your account.^[5]

How does APR work on a secured credit card?

The APR, or annual percentage rate, on a credit card is the amount it costs you to borrow a credit card issuer’s money. With credit cards, APR is essentially the same as the interest rate. However, that’s not true for all types of credit.^[6]

Whether your credit card is secured or unsecured, the APR will determine how much interest you’ll pay if you revolve a balance on your account from one billing cycle to the next. A good credit score might help you qualify for a lower APR once you’re in a position to open unsecured credit cards. But regardless of your APR, if you make a habit of paying off your full statement balance each month you can avoid paying credit card interest.

This feature is one reason credit cards have the potential to be such great credit-building products. When you discipline yourself to pay off your full balance every month, you may be able to build credit without going into debt or paying expensive interest costs.

Does a secured credit card limit go up or can I increase it?

Your ability to increase or qualify for a higher credit limit on a secured credit card has to do (at least in part) with your card issuer’s policy. In some cases, you may be able to send in additional cash to add to your security deposit and raise your credit limit if you desire to do so.

A few card issuers might automatically increase the credit limit on your secured credit card over time as you demonstrate responsible credit card management habits. Yet automatic credit limit increases are less common with secured credit cards than they are with unsecured credit cards.

Credit limit increases at Self

If you have the secured Self Visa® credit card, you may become eligible to make your own secured credit limit increases. Some cardholders may also be eligible for unsecured credit limit increases. Find more details about Self credit limit increases by reviewing these FAQs.

Difference between secured credit card vs. prepaid debit card

Secured credit cards and prepaid debit cards may look similar on the outside. Yet there are meaningful differences in how these two different plastic payment methods operate.

To begin, many secured credit cards have the potential to help you establish a positive credit history. Prepaid debit cards do not build credit.^[7]

The billing cycle with secured credit cards works the same way as unsecured credit cards. When you make a charge, the card issuer will generate a statement and you’ll owe a payment by the due date on your bill. You must make at least the minimum payment on your credit card statement to avoid late payment charges and negative credit reporting (and it’s best to pay your full statement balance to avoid interest charges).

Prepaid debit cards, on the other hand, work more like gift cards. You load money onto a prepaid debit card and you can spend those funds (minus any applicable fees) until they are gone. Then, if you want to use the card again, you’ll need to load more cash onto your account before you can use it again as a payment method.

When should I pay my secured credit card?

It’s important to pay your secured credit card bill no later than the due date on your statement each month. Paying by the due date can make sure you don’t incur late fees on your account or experience other negative consequences.

If you fall a full 30 days behind on your credit card payment, your credit card issuer could report you as 30-days past due to the credit bureaus. Then, you could wind up with a late payment on your credit report, and that has the potential to damage your credit score.^[8]

In an effort to keep utilization ratios as low as possible, some credit card customers pay their credit card bills before the due date arrives. While it is always good to pay on or before your due date, your statement balance is typically reported to the credit bureaus, so if you are concerned about your credit utilization you can make an extra payment before your statement closing date. If you pay your bill before the statement closing date on your account, you might wind up with a lower balance on your statement and a lower credit utilization rate for the upcoming month. (Note: the balance on your statement is typically the balance your credit card issuer reports to credit bureaus when it updates your account details each month.)^[9][10]

How do I make a payment on my secured credit card?

Depending on your credit card issuer’s policies, you may have a few different payment options for your secured credit card. Check your statement or call your credit card company to see which of the following payment options may be available to you.

• Online payments
• Phone payments
• Mail-in payments
• Automatic drafts

Auto-pay can also be a great resource if your card issuer offers this feature. Even if you plan to make manual payments each month, scheduling automatic drafts for at least the minimum payment could protect you in case you ever miss the due date on your account.

Are secured credit cards considered major credit cards?

The four major credit networks are as follows:

• Visa
• Mastercard
• American Express
• Discover^[11]

It is possible to get a secured credit card from credit card issuing banks that are associated with many (if not all) of the major credit card networks.

Can I withdraw money from my secured credit card?

In general, you cannot access the security deposit that’s attached to your secured credit card. The only way to withdraw your security deposit from a secured credit card would be to close the account. Then, the card issuer would likely use those funds to pay off your outstanding balance and any fees due on your account before returning any remaining balance to you. Some banks may also return your security deposit to you automatically after you demonstrate a track record of responsible credit card management.^[12]

How long until my secured credit card becomes unsecured?

If you use your secured credit card in a responsible manner, some credit card issuers might give you an opportunity to upgrade to an unsecured credit card in the future. Depending on the credit card company, this process might involve an application for a new unsecured credit card and the closure of your original account. Other card issuers might let you keep your original account and credit card number and convert it to an unsecured credit card instead.^[13]

In either scenario, you may be eligible for reimbursement of your initial security deposit (either in the form of a check or a statement credit). If you’re interested in the possibility of upgrading your secured credit card in the future, you should ask your credit card company if doing so is an option. Keep in mind that even if upgrading your credit card is possible, you may still want to shop around and compare available credit card offers when you become eligible for a card upgrade to make sure it’s the right fit for your situation at that time.

Self secured credit card

The Self secured card is a unique secured credit card option that’s available to eligible Self Credit Builder Account holders. To become eligible for the card, you must first sign up for a Credit Builder account with Self. Next, you’ll need to reach a minimum of $100 in your savings progress. (Make three on-time payments as well with an account in good standing.)

From there, you can choose how much of your Credit Builder Account savings you would like to apply toward your security deposit. The amount you select will be equal to the credit limit on your new secured credit card. You don’t have to come up with any additional upfront deposit and there’s no hard credit inquiry to worry about either.

Sources

1. Chase.com. “How to use secured and unsecured credit cards” https://www.chase.com/personal/credit-cards/education/build-credit/secured-and-unsecured-credit-cards
2. Experian.com. “How Secured Credit Card Deposits Work” https://www.experian.com/blogs/ask-experian/how-does-the-deposit-in-a-secured-card-work/
3. Discover.com. “Secured Credit Cards: Credit Cards & Security Deposits” https://www.discover.com/credit-cards/card-smarts/secured-credit-card-myths-and-realities/
4. CapitalOne.com. “What are secured credit cards and how do they work?” https://www.capitalone.com/learn-grow/money-management/how-secured-credit-cards-work/
5. Equifax.com. “What Is a Secured Credit Card and Does It Build Credit?” https://www.equifax.com/personal/education/credit-cards/what-is-a-secured-credit-card-do-they-build-credit/
6. CapitalOne.com. “APR vs. interest rate: What’s the difference?” https://www.capitalone.com/learn-grow/money-management/apr-vs-interest-rate/
7. myFICO.com. “Will Prepaid Credit Cards Help You Build Credit?” https://www.myfico.com/credit-education/blog/prepaid-credit-cards
8. Equifax.com. “When Does a Late Credit Card Payment Show Up on Credit Reports?” https://www.equifax.com/personal/education/credit-cards/when-late-credit-card-payments-post/
9. Experian.com. “How Do Credit Card Payments Work?” https://www.experian.com/blogs/ask-experian/how-do-you-pay-a-credit-card-bill/
10. myFICO.com. “Why does my credit report show balances when they’re paid off each month?” https://support.myfico.com/hc/en-us/articles/360039242213-Why-does-my-credit-report-show-balances-when-they-re-paid-off-each-month-
11. Chase.com. “Credit card issuer vs. credit card network.” https://www.chase.com/personal/credit-cards/education/basics/credit-card-issuer-vs-network
12. Personal-finance.extension.org. “The Pros and Cons of Secured Credit Cards.” https://personal-finance.extension.org/the-pros-and-cons-of-secured-credit-cards/
13. CapitalOne.com. “Upgrading from a secured to an unsecured credit card.” https://www.capitalone.com/learn-grow/money-management/unsecuring-capital-one-secured-card-upgrade/

About the author

Michelle Lambright Black is a nationally recognized credit expert with two decades of experience. She is the founder of CreditWriter.com, an online credit education resource and community that helps busy moms learn how to build good credit and a strong financial plan that they can leverage to their advantage. Michelle's work has been published thousands of times by FICO, Experian, Forbes, Bankrate, MarketWatch, Parents, U.S. News & World Report, and many other outlets. You can connect with Michelle on Twitter (@MichelleLBlack) and Instagram (@CreditWriter).

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