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How Does a Secured Credit Card Work?

If you have thin or poor credit a secured credit card can be an option to help build your credit. Learn about the pros and cons of secured credit cards and how they differ from unsecured credit cards and prepaid cards.

Rebecca Lake • January 27, 2021

A credit card can make paying bills or shopping for the holidays super convenient. But getting approved for one isn’t always a lock if you don’t have 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 37 percent of Americans have credit scores that put them in the fair or very poor borrower category. And, a poor credit score can indeed can lower your odds of getting approved for a credit card.

Fortunately, you’re not completely shut out of the credit card game if you have thin or poor credit. Secured credit cards can give you purchasing power, while also helping you build your credit score.

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In This Article

  1. What's a Secured Credit Card?
  2. The pros and cons of secured credit cards
  3. Secured Credit Cards vs. Unsecured Credit Cards
  4. Secured credit cards vs. prepaid debit cards
  5. Building credit with a secured credit card
  6. Alternative to traditional secured credit cards
  7. FAQs

What's a Secured Credit Card?

It’s simple. A secured credit card is a card that requires you to offer up a cash deposit as collateral. The deposit is an insurance policy for the credit card company in case you default on paying back your balance.

The amount of the deposit varies, depending on the card. Typically, your deposit doubles as your credit limit. So, if you open a secured credit card account with a $500 deposit, your credit limit would be $500.

As you make purchases against that limit, your available credit shrinks. There are some secured credit cards that allow you to put down a smaller initial deposit. Some also let you increase your credit limit by adding to your deposit after opening your account.

But Wait…What Happens to Your Deposit?

After you make your deposit, the credit card company holds onto it. 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.

The pros and cons of secured credit cards

Like all things in life, secured credit cards have pros and cons. 

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

Secured Credit Cards vs. Unsecured Credit Cards

The biggest difference between secured credit cards and unsecured cards is the cash deposit, mentioned earlier. Unsecured credit cards don’t require one.

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. Your available credit increases when you make a payment.

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

Also, it is important to note that typically, unsecured cards have a higher credit score requirement.

Secured credit cards vs. prepaid debit cards

The defining difference between secured credit cards and prepaid debit cards comes down to where the money on the card comes from. With secured credit cards, you’re spending money that you borrow from the credit card company. You pay that money back after the purchase. With prepaid debit cards, you’re spending your own money. You load money onto the card before the 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.

Building credit with a secured credit card

Secured credit cards can be a great starter option when you’re trying to establish your credit score. They’re also helpful for rebuilding credit if your score takes a serious hit because of something like bankruptcy or foreclosure.

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 five factors, the two most important things you can do with your secured card are:

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

Making sure you pay on time is as easy as scheduling payments through the Chime mobile banking app. You just need to give your credit card company your Chime Spending Account number and routing number to set up an ACH payment.

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

Those are two easy peasy ways to give your credit score a boost.

Using other types of credit, like a personal loan, is another way to boost your credit. Just don’t go overboard applying for new credit, since inquiries can take a few points away from your score.

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

Alternative to traditional secured credit cards

If you’re still looking to build your credit but a secured credit card doesn’t sound like a fit for you, there are alternatives! Unlike traditional secured credit cards, Chime’s new Credit Builder card does not check your credit at application and has no minimum security deposit.

Chime’s new Credit Builder is a secure 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 towards your credit score. Apply today!

Find the card that best fits your needs

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. But remember, they’re not all the same. Take time to compare different options carefully to make sure you’re choosing the secured card that best fits your needs and spending style.

FAQs

How can I get a secured credit card?

The application process 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. You can typically make your deposit online, over the phone, or by mail. Once the issuer receives and processes your security deposit, you’ll get your new credit card in the mail.

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 secured credit card requirements. Aside from a security deposit, there may be additional 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 APRs for:

The fees you pay can also vary. Some secured cards charge an annual fee; 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?

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 6-12 months. And if you start with a bad credit score, you can expect to qualify for an unsecured credit card for fair credit within 12-18 months.

Do secured credit cards come with any extras?

Some secured cards come with perks. Some don’t.

There are some secured credit cards, for example, that let you earn rewards when you spend. Some offer cash back, some offer points and others give you travel miles.

Secured cards can also come with features like free fraud monitoring or monthly credit score access. Some even waive late fees the first time you miss your due date.

Make sure you read all of the fine print and know what the benefits are. This way you’ll be informed.

Banking services provided by The Bancorp Bank or Stride Bank, N.A., Members FDIC. The Chime Visa® Debit Card is issued by The Bancorp Bank 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 is 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.

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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 Spending Account each month. 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 Friends 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. ATM withdrawals will be fee-free at all Moneypass ATMs until at least August 7, 2021. 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.

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