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Banking Basics

How Does a Secured Credit Card Work?

Trying to work on your credit? A secured credit card might be the best option for you. But, it’s a good idea to know all the basics first. Take a look at the pros and cons of secured credit cards and how they differ from more traditional cards.

Rebecca Lake • December 10, 2021

In This Article

  1. What's a secured credit card?
  2. How to use a secured credit card: pros and cons
  3. Building credit with a secured credit card
  4. Secured vs. unsecured credit cards
  5. Secured credit cards vs. prepaid debit cards
  6. Start building credit with Chime
  7. FAQs
  8. Final thoughts

A credit card can make paying bills or shopping for the holidays super convenient. But getting approved for one isn’t always a lock, especially if you don’t have a good credit score or years of responsible credit use under your belt.

According to Experian, 62 million Americans have a thin credit file. Essentially, this means that they don’t have enough information on their credit report to calculate a credit score. Experian also found that only 21% of Americans have a credit score that falls in the “good” credit score range, making it difficult for those with less than “good” credit to obtain a credit card.

Fortunately, you still have a shot at getting approved for a credit card, even with poor credit. Secured credit cards can give you purchasing power, while also helping you build your credit score.

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What's a secured credit card?

A secured credit card uses collateral, usually in the form of a cash deposit, as an insurance policy of sorts. In short, if you can’t make your payments or pay back the balance, the card issuer gets to keep the deposit.

The amount of the deposit varies, depending on the card. Typically, the deposit is equal to your credit limit on that card.So, if you open a secured credit card account with a $500 deposit, your credit limit would also be $500.

The deposit reduces the risk for the credit card company, which is a major reason why secured credit cards are available to people with poor or no credit.

How to get a secured credit card

The first step to getting a secured credit card is to do some research and find out the best card option for your finances. Once you select a card, apply. Since the credit card is secured, you will likely need to provide your bank account information that the card will be tied to, along with your personal information. Once you’re approved, the issuer will give you instructions for making your security deposit. 

Once your security deposit is received and processed, you’ll get your new credit card in the mail, and it’s ready for use!

Since this type of card involves collateral, consider paying off your balance every month to avoid high-interest charges or losing your deposit altogether.

How to use a secured credit card: pros and cons

A secured credit card serves as a valuable training ground to learn which money management tools fit your financial circumstances. A secured credit card is also a powerful tool when used the right way. Here’s how to use one most effectively:

  1. Use the card reasonably, making only a couple of smaller purchases every month, especially to start.
  2. Pay your balance in full every month before the due date. When you pay in full, you won’t be charged interest, and interest rates on secured cards are generally higher than those on unsecured cards.
  3. Keep an eye on your credit score over time. When it has improved, ask your issuer about potentially upgrading to an unsecured card to help boost that score even more.

Like all things in life, secured credit cards have pros and cons. Let’s look at a few:

Pros:

  • You can boost your credit score.
  • You can use your card to make secure purchases online.
  • You don’t need a high credit score to get approved for a card.

Cons:

  • You generally receive a smaller credit limit.
  • You may encounter annual fees and high interest rates.
  • If you default on payments, you may lose your deposit.

Building credit with a secured credit card

Secured credit cards can offer a foundation when you’re trying to establish or build your credit score.

FICO credit scores, which are most often used by lenders, are based on five factors:

  1. Payment history (35%)
  2. Amounts owed (30%)
  3. Length of credit history (15%)
  4. Applications for new credit (10%)
  5. Types of credit used (10%)

That’s pretty straightforward. So how do you use a secured credit card to build (or rebuild) your score?

It’s all about your habits. Based on those 5 factors, the two most important things you can do with your secured credit card are:

  • Pay your bill on time each month
  • Keep a low balance

Paying your bills on time each month accounts for 35% of your overall credit score, so this is the best way to build up a good credit history and demonstrate to the credit card issuer and credit bureaus that you are a responsible user. 

In addition to paying your bills on time, your credit utilization – your available credit compared to the credit you have used – is something to keep an eye on as well. Aiming to keep this ratio at 30% or less is a good goal, but staying at under 10% is even better.

Follow these two easy ways to give your credit score a boost, and you might be able to qualify for a regular credit card in no time.

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

Secured vs. unsecured credit cards

Secured and unsecured credit cards work similarly; however, the biggest difference is the security deposit. Unsecured credit cards don’t require one, which poses more risk to the issuer. Unsecured cards usually require at least average or good credit for approval because of this risk.

Secured cards and unsecured cards work the same in terms of how you use them. When you make a purchase with an unsecured card, your credit limit is reduced by that amount, and your available credit increases again when you make a payment.

It doesn’t matter if a card is secured or unsecured to the credit reporting bureaus. Your account activity can still show up on your credit reports.

Secured credit cards vs. prepaid debit cards

If you’re wondering about prepaid debit cards, the defining difference is where the money on the card comes from. With secured credit cards, money is essentially borrowed from the credit card company for your purchases. Then, you pay the company back after the fact. With prepaid debit cards, money is already available to be spent, since you have loaded (prepaid) the card prior to making transactions.

When you pay the card issuer back on time, secured credit cards have the ability to ultimately help you build credit. However, the opposite is true when not used responsibly. Since you load your own money on prepaid debit cards, they have no effect on your credit score.

Start building credit with Chime

Chime’s Credit Builder Secured Visa Credit Card* is a secured credit card with no annual fee or interest that allows you to build your credit. Chime reports payments to major credit bureaus, so everyday purchases like gas, groceries, bills, and subscriptions can all count toward your credit score. Chime’s Credit Builder card doesn’t check your credit at application and has no minimum security deposit, so applying is easy.

FAQs

How do you get your security deposit back?

After you make your security deposit, the credit card company holds onto it, and there are two ways you can get it back.

The first way to get your deposit back is to graduate to an unsecured credit card. Your credit card company may review your secured card account periodically. If you’ve established a record of using your card responsibly, it may switch you to an unsecured card. In that case, your deposit is refunded.

The other way to get it back is to close your account. But, you’d have to pay off your balance first. Otherwise, the credit card company could keep part or all of your deposit as payment.

Can you get denied for a secured credit card?

There’s no guarantee that you will get approved for a secured credit card. When you submit an application, your information will be reviewed and compared to the issuer’s policies and approval requirements

What is a good APR for a secured credit card?

Every secured credit card is different when it comes to the fees and APRs they charge. Here’s a good rule of thumb to remember: lower credit scores usually equate to higher interest rates. If you’re starting from scratch with credit, you may be looking at a higher APR.

Remember, secured cards can come with more than one APR, and you may have different ones for:

The fees you pay can also vary. Some secured cards charge an annual fee; while others don’t. Some may also charge a monthly service fee, or a fee for increasing your deposit.

The takeaway? Read the fine print on secured card fees, rates and terms so you know exactly what you’re paying.

How much will a secured credit card raise my score?

Any change in your credit score due to a secured credit card is hard to predict, but with a low credit utilization rate and on-time bill payment, you might see improvement after about 6 – 12 months. With a bad credit score or fair credit, you might qualify for an unsecured credit card within 12 – 18 months.

Final thoughts

If you’re ready to improve your credit score, a secured credit card can help you do this. These cards can also potentially help you earn rewards as you spend. Some also offer cash back, points, or travel miles, but remember, they’re not all the same. 

Make sure you read all of the fine print and know what the benefits are for each card you apply for. Take the time to compare different options carefully to make sure you’re choosing the secured credit card that best fits your needs and spending style.

Chime is a financial technology company, not a bank. Banking services and debit card provided by The Bancorp Bank or Stride Bank, N.A.; Members FDIC. Credit Builder card issued by Stride Bank, N.A.

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Opinions, advice, services, or other information or content expressed or contributed here by customers, users, or others, are those of the respective author(s) or contributor(s) and do not necessarily state or reflect those of The Bancorp Bank and Stride Bank N.A. (“Banks”). Banks are not responsible for the accuracy of any content provided by author(s) or contributor(s).

1 Chime SpotMe is an optional, no fee service that requires a single deposit of $200 or more in qualifying direct deposits to the Chime Checking Account each month and Visa debit card activation. All qualifying members will be allowed to overdraw their account up to $20 on debit card purchases and cash withdrawals initially, but may be later eligible for a higher limit of up to $200 or more based on member's Chime Account history, direct deposit frequency and amount, spending activity and other risk-based factors. Your limit will be displayed to you within the Chime mobile app. You will receive notice of any changes to your limit. Your limit may change at any time, at Chime's discretion. Although there are no overdraft fees, there may be out-of-network or third party fees associated with ATM transactions. SpotMe won't cover non-debit card transactions, including ACH transfers, Pay Anyone transfers, or Chime Checkbook transactions. See terms and conditions.

2 Out-of-network ATM withdrawal fees apply except at MoneyPass ATMs in a 7-Eleven location or any Allpoint or Visa Plus Alliance ATM. Other fees such as third-party and cash deposit fees may apply.

3 Early access to direct deposit funds depends on the timing of the submission of the payment file from the payer. We generally make these funds available on the day the payment file is received, which may be up to 2 days earlier than the scheduled payment date.

* To be eligible to apply for Credit Builder, you need to have received a qualifying direct deposit of $200 or more to your Spending Account within the last 365 days of your application. The qualifying direct deposit must have been made by your employer, payroll provider, or benefits payer by Automated Clearing House (ACH) deposit. Bank ACH transfers, Pay Friends transfers, verification or trial deposits from financial institutions, peer to peer transfers from services such as PayPal, Cash App, or Venmo, mobile check deposits, and cash loads or deposits are not qualifying direct deposits.

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