How Does a Secured Credit Card Work?

When you open a secured credit card, you’ll put down a refundable cash deposit, which acts as collateral. If you’re unable to pay your balance, the card issuer keeps your deposit rather than losing the money. It’s like an insurance policy for the card issuer.

So, what happens to your deposit? The card issuer holds onto it while your account is open. You can usually get it back in one of two ways:

• Upgrade to an unsecured card. Your card issuer may upgrade you to an unsecured credit card if you use your card responsibly. If this happens, the issuer will refund your deposit.
• Close the account. Just make sure you pay off any remaining balance first. If you don’t, the issuer might keep your deposit to cover the debt.

A secured credit card gives you a line of credit that’s backed by your security deposit. Unlike a debit card, where you spend your own money directly, you’re borrowing from the issuer when you use a secured card. You then pay back the borrowed money over time.

Deposits usually start at $200, though they can be as high as $5,000.¹ The deposit amount typically sets your credit limit. For example, if you deposit $200, your credit limit will likely be $200.

As you make purchases, your available credit decreases, and as you pay off the balance, your available credit increases. If you fall behind on payments, the card issuer can use your security deposit to recover the outstanding balance.

You can use a secured card for purchases anywhere its payment network is accepted. Your credit card issuer reports your payment activity to the credit bureaus, so making on-time payments is key to building or repairing your credit score.

Pro Tip: The longer your account stays open, the longer your credit history grows. This can also help boost your credit score over time.

Unsecured and secured credit cards have several differences. The table below shows these differences at a glance.

Unsecured cards don’t require a security deposit, which is why they usually have stricter credit score requirements. Secured cards have lower credit score requirements, but in return, tend to have lower credit limits.

In terms of use, both cards work similarly. You make purchases up to a preset credit limit, then make payments to reduce your balance. For both card types, your payment history is reported to the credit reporting bureaus.

Both secured and unsecured cards may charge annual fees. Unsecured cards often come with rewards programs, such as cash back or travel points. Some secured cards offer rewards, but it’s less common.

Because credit cards involve borrowing and repaying money, they can help you build your credit if used responsibly. But they can also harm your credit if you fail to make on-time payments or frequently max out your credit limit.

One of the biggest benefits of a secured credit card is the positive impact it can have on your credit score. Nine out of 10 top lenders use FICO^® Scores when processing your credit application.⁴ Here are the factors that affect your credit score.

Prioritizing monthly credit card payments is the best thing you can do to boost your credit. And keeping your credit usage low shows lenders that you can use credit responsibly. Ideally, keep your credit utilization below 30% to avoid a ding to your credit score – the lower the better!⁷

Consider setting up automatic payments from your checking account to ensure on-time payments. You can usually do this by providing your account and routing numbers to the credit card company.

Staying on top of your balance is simple, too, if your secured card has an alert feature that lets you set a balance threshold you want to stay under. The alert will let you know when you’re getting close to that amount so you can pause any new charges.

There are also several ways to build credit without a credit card, like taking out a personal or credit-builder loan, using a rent-reporting service, or becoming an authorized user on someone else’s credit card. Just don’t go overboard with new credit applications, since inquiries can take a few points off your score.

Getting a secured credit card is a straightforward process. Follow the steps below to get started:

• Shop around for the right card. Check for fees, grace periods, upgrade potentials, and security deposit amounts.
• Apply online or in person. Fill out the application with your personal information and submit it to the card issuer.
• Make the deposit. Depending on the lender, you might be able to make your security deposit online, by phone, or by mail.
• Receive your new card. Once the issuer processes your deposit, it will mail your card to you. Some financial institutions may issue virtual cards.
• Make on-time payments. The point of a secured credit card is to build your credit, so keep on top of your monthly payments to see a boost to your score

Ready to improve your credit score? A secured credit card can help you reach your goals! Some cards may even help you earn rewards as you spend. Compare your options to find a card that fits your spending style and financial goals.

Not sure what type of credit card to apply for? Learn more about the differences between secured and unsecured credit cards.