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Banking Basics

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

How does a secured credit card work? We’ll cover the basics of building credit with a secured debit card – and how they differ from unsecured credit cards.

Timothy Moore • October 5, 2022

In This Article

  1. What is a secured credit card?
  2. How to get a secured credit card
  3. How does a secured credit card work?
  4. Pros and cons of secured credit cards
  5. Building credit with a secured credit card
  6. Secured vs. unsecured credit cards
  7. Secured credit cards vs. prepaid debit cards
  8. Alternatives to secured credit cards
  9. Start building credit with Chime
  10. FAQs
  11. Boost your credit with a secured credit card

A secured credit card is an alternative to a traditional credit card that makes it easier for people with bad credit or no credit history at all to start improving their credit score. Unlike a traditional credit card, a secured credit card requires an initial security deposit to open the account.

For many, secured credit cards are the first step to taking control of their credit journey. They’re a vital resource for people who don’t have extensive credit histories or who need a second chance with their finances.

Does that sound like the right kind of credit card for you? Read on to learn how a secured credit card works, how to get a secured credit card, and what makes them different from unsecured credit cards.

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What is a secured credit card?

A secured credit card is a card that requires you to offer up a cash deposit as collateral when you open the account. The deposit is an insurance policy for the credit card company in case you can’t make your payments or default on paying back your balance.

If you use your secured credit responsibly, you can expect your credit score to increase. The secured credit card issuer may allow you to upgrade to an unsecured credit card; if not, you can apply for a credit card elsewhere once your credit score is strong enough.

The typical hallmarks of a good secured credit card include a low minimum deposit and availability to borrowers with bad credit.

Secured credit card: Low deposit

The amount of the opening deposit for a secured credit card varies by card issuer. Typically, the deposit is equal to your credit limit on that card. For example, if you open a secured credit card account with a $500 deposit, your credit limit would also be $500.

Secured credit card: Bad credit

The deposit reduces the risk for the credit card company, meaning if you don’t pay your bill, the issuer can take the money from your deposit to get their funds back. This is a major reason secured credit cards are available to people with poor or no credit. Often, borrowers with bad credit cannot get approved for any other type of credit card.

How to get a secured credit card

The first step to getting a secured credit card is to research the best card option for your finances. Once you select a card, fill out and submit an application. The application process for a secured credit card will require your personal information, including info for a bank account that can be tied to the card. Once you’re approved, the issuer will give you instructions for making your security deposit. 

The main difference with a secured credit card application is that it will require your bank account and routing number to process the security deposit.

Pro Tip: Some secured credit cards still require a credit check for approval, resulting in a hard inquiry on your credit report. If you’re trying to find an option that skips the credit check, consider the Chime Credit Builder Secured Visa® Credit Card.¹

Once the issuer receives and processes your security deposit, you’ll get your new credit card in the mail, ready for use.

Since secured cards require collateral from borrowers as part of their agreement, paying off your balance in full every month is good practice to avoid high interest charges or losing that deposit altogether.

How does a secured credit card work?

A secured credit card can be a valuable tool in building your credit score if you spend responsibly and stay on top of payments. Here’s how they work: Cardholders make an initial security deposit, then use their secured credit card on everyday purchases and monthly bills without exceeding their credit limit (usually equal to the security deposit amount).

Most creditors report those on-time payments to credit bureaus, which can help boost the cardholder’s score. That’s why it’s crucial that you pay off your secured card in full and on time each month. Eventually, with enough responsible usage, the cardholder may be able to graduate to an unsecured credit card.

Here are some tips for effectively using a secured credit card:

  1. Spend wisely. Use the card strictly on necessary expenses, ideally only if you already have the money in a checking or savings account to pay it off. This is good practice for an unsecured credit card: only spend what you can afford to pay each month.
  2. Pay it off. Pay your balance in full every month before the due date. When you pay in full, you won’t be charged interest. Interest rates on secured cards are generally higher than those on unsecured cards.
  3. Monitor your score. 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. If the issuer won’t approve you for an unsecured credit card, research other lenders and consider applying if you have a good chance of approval.

Pros and cons of secured credit cards

Secured credit cards can be beneficial to new borrowers or borrowers with bad credit, but they also come with their share of drawbacks.

Pros:

So what are the benefits of a secured credit card?

  • Secured credit cards can help you boost your credit score over time
  • You can use your card to make secure purchases online.
  • You don’t need a high credit score to get approved for a secured credit card.

Cons:

There are a few downsides to secured credit cards to consider:

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

Building credit with a secured credit card

Secured credit cards can be a great starting point when you’re trying to establish or repair your credit score.

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

  1. Payment history (35%)
  2. Credit utilization (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 credit card habits. Adopting two specific best practices for using a credit card can be instrumental in improving your credit score:

  • 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 under 10% is even better.

Stick to these two habits with your secured credit card, and you might be able to qualify for a regular credit card in a few months.

Pro Tip: The longer your account stays open, the older your credit history becomes. This has a direct impact on your credit score over time. 

Secured vs. unsecured credit cards

So what is the difference between secured and unsecured credit cards? The biggest difference is the security deposit. Unsecured credit cards don’t require such a deposit, which poses more risk to the issuer. Because of this risk, unsecured cards usually require at least average or good credit for approval.

Secured 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 bureaus. Your account activity can still show up on your credit reports, as long as your secured credit card issuer is reporting it. 

Secured credit cards vs. prepaid debit cards

And what about the difference between prepaid debit cards and secured cards? Here, the biggest distinction is where the money on the card comes from. With secured credit cards, you’re spending money you borrow from the credit card company, which you pay back at some point after the purchase. With prepaid debit cards, you’re spending your own money, as you load money onto the card before making a purchase.

Because it involves borrowing and repaying money, a secured credit card can help you build your credit, but it can also harm your credit when not used responsibly. Prepaid debit cards, on the other hand, have no effect on your credit score.

Alternatives to secured credit cards

If you’re trying to build or repair your credit score, secured credit cards are a good option – but they’re not your only option. Consider some of these alternatives for improving your credit score:

  • Become an authorized user: If a partner or family member has a strong credit score and uses their card responsibly, you could benefit from being added to their card as an authorized user
  • Apply for a student credit card: As a student, you may qualify for a student credit card. Even though these cards are for borrowers with no credit history, they usually do not require a security deposit.
  • Focus on paying down your debt: If you’re trying to rebuild your credit score because of past mistakes, it might make more sense to pay off credit card debt you already have. Though it’s hard work, it will reduce your credit utilization and boost your credit score, which could eventually position you to qualify for an unsecured credit card.

Start building credit with Chime

Chime’s Credit Builder Secured Visa Credit Card¹ 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 with a secured credit card?

After you make a security deposit for a secured credit card, the credit card company holds onto it. Generally, 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 will be refunded.

The other way to get your deposit back is to close your account. To do so, you’d have to pay off your balance first. Otherwise, the credit card company could keep part or all of your deposit as payment. Closing a credit card can impact your credit score by reducing your overall credit utilization and decreasing your average length of credit history. 

Can you get denied for a secured credit card?

As with any credit card, getting approved for a secured card isn’t guaranteed. Each credit card company has its own policies and requirements. A credit card issuer may have additional approval requirements beyond the security deposit.

What is a good APR for a secured credit card?

Every secured credit card is different regarding the fees and APRs they charge. Here’s a good rule of thumb: Lower credit scores usually equate to higher interest rates. If you’re starting from scratch with credit, you should expect a higher APR.

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 charge anything. 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 to know exactly what you’re paying.

How much will a secured credit card raise my score?

It’s hard to say exactly how much a secured credit card will raise your credit score or how fast your score will improve. Assuming you pay your bills on time and maintain a low credit utilization rate, you can expect to see improvements in your credit score after about six to 12 months. And if you start with a bad credit score, you can expect to qualify for an unsecured credit card for fair credit within 12 to 18 months. Chime Credit Builder Secured Visa® Credit Card users can see an average 30-point increase in their credit score over eight months.²

What is the difference between secured and unsecured credit cards?

Unlike unsecured credit cards, secured credit cards require an initial security deposit, which typically serves as your credit limit. If you deposit $500, your credit limit will likely also be $500. This reduces risk to the credit card issuer; that’s why people with bad credit or no credit have an easier time getting approved. 

Do secured credit cards build credit?

When you sign up for a secured credit card, make sure the card issuer reports activity to the major credit bureaus. If they do, the card can help you build credit, as long as you make on-time payments in full each month. But don’t forget how credit cards work: If you miss a payment on your secured credit card, your credit score could go down. Just because it’s “secured” by your deposit doesn’t mean it can’t have damaging effects on your credit.

How many credit cards should a person have?

The number of credit cards you should have depends on how you use them. If you are able to juggle multiple payment dates and pay the cards in full each month, it can be beneficial to have several credit cards open. 

Multiple cards mean a higher credit limit, which can help keep your credit utilization low. If you have a good or excellent credit score, you may even qualify for various rewards credit cards that earn you cashback or travel points. If you’re just starting out on your credit journey or have a history of credit card debt, it may be wise to stick to one credit card – ideally a secured credit card.

Boost your credit with a secured credit card

A secured credit card is a helpful tool for building and repairing credit. While you’ll have to pay a security deposit, responsible card usage over time can lead to a jump in your score. It may help you graduate to an unsecured credit card with no fees, no deposit, and maybe even some nice rewards.

Not all secured credit cards are created equal. While some have fees or require a credit check, the Chime Credit Builder Secured Visa® Credit Card¹ has no annual fees or interest, no credit check to apply, and not even a minimum security deposit to get started.³

Banking services provided by The Bancorp Bank, N.A. or Stride Bank, N.A., Members FDIC. The Chime Visa® Debit Card is issued by The Bancorp Bank, N.A. or Stride Bank pursuant to a license from Visa U.S.A. Inc. and may be used everywhere Visa debit cards are accepted. The Chime Visa® Credit Builder Card and the Chime Visa® Cash Rewards Card are issued by Stride Bank pursuant to a license from Visa U.S.A. Inc. and may be used everywhere Visa credit cards are accepted. Please see back of your Card for its issuing bank.

While Chime doesn’t issue personal checkbooks to write checks, Chime Checkbook gives you the freedom to send checks to anyone, anytime, from anywhere. See your issuing bank’s Deposit Account Agreement for full Chime Checkbook details.

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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, N.A. and Stride Bank, N.A. (“Banks”). Banks are not responsible for the accuracy of any content provided by author(s) or contributor(s).

1 To be eligible to apply for Credit Builder, you need to have received a qualifying direct deposit of $200 or more to your Checking 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 Anyone 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.

2 Based on a representative study conducted by Experian®, members who made their first purchase with Credit Builder between June 2020 and October 2020 observed an average FICO® Score 8 increase of 30 points after approximately 8 months. On-time payment history can have a positive impact on your credit score. Late payment may negatively impact your credit score.

3 Security Deposit Money added to Credit Builder will be held in a secured account as collateral for your Credit Builder card, which means you can spend up to this amount on your card. This is money you can use to pay off your charges at the end of every month.

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