How do secured credit cards work?

Merchant at a farmers' market accepting a secured credit card from a customer after learning how they work Image: Merchant at a farmers' market accepting a secured credit card from a customer after learning how they work

In a Nutshell

Although a secured card requires a deposit, this type of credit card can be helpful for people who otherwise can’t open a line of credit. When used responsibly, secured cards can give you an opportunity to build or rebuild your credit.

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These offers are no longer available on our site: Citi® Secured Mastercard®, Capital One® Secured Mastercard®, Capital One® Venture® Rewards Credit Card

A secured card can be a great way to learn to use credit.

Do you remember when you got your driver’s license? It’s a proud moment for novice drivers. Before you could put that license in your wallet, though, you likely had a learner’s permit. This permit allowed you to get behind the wheel while you were still learning how to navigate the road.

In the credit card universe, a secured credit card is like a learner’s permit — except it’s not mandatory — while a traditional (unsecured) credit card is like a driver’s license. Obtaining and using a secured credit card wisely can help you advance to the next level — an unsecured card.

What’s a secured credit card?

A secured card is an actual credit card, unlike a debit card or prepaid card. It’s designed for someone who’s seeking to build or rebuild credit. This can include somebody who has bad credit or no credit history at all.

Unlike a debit card or prepaid card, the issuer of a secured card may share your activity, such as your monthly payment history, with the major credit bureaus — Experian, Equifax and TransUnion. This can help you build a credit history, improve your credit health and eventually upgrade to an unsecured no-deposit card.

As the name implies, a secured credit card is secured by money that you deposit with the issuer. An unsecured card requires no cash deposit.

In some cases, the deposit is saved in an interest-earning account tied to the secured credit card. But some deposits don’t earn a penny of interest.

The amount you’ll need to deposit can vary by issuer and card. The Citi® Secured Mastercard®, for instance, requires a minimum deposit of $200. That $200 secures a $200 credit line. Capital One, on the other hand, offers a $200 initial credit limit for its Capital One® Secured Mastercard® after you deposit $49, $99 or $200. If you don’t have that much cash saved up, don’t fret — some issuers let you pay your deposit in chunks, rather than all at once.

From our partner

Capital One® Secured Mastercard®

From cardholders in the last year

In some cases, a card issuer will boost your secured card’s credit limit without another cash deposit if you’ve handled your account well. This includes paying your bills on time and keeping your card balances below the credit limit.

Can I get approved for a secured credit card?

Just because you can make a deposit doesn’t mean you’ll be guaranteed approval for a secured card. For example, Capital One will decline your application if you don’t meet certain conditions, such as having a bank account.

But approval may be more likely with some other secured credit cards. For instance, Capital Bank, the issuer of the OpenSky® Secured Credit Visa® Card, doesn’t check your credit.

From our partner

OpenSky® Secured Credit Visa® Card

From cardholders in the last year

See Details, Rates & Fees

James Garvey, co-founder and CEO of Self Lender, which provides credit-building loans, recommends thoroughly reading the agreement for your secured card to be sure you understand all of the terms and conditions, including the fees and annual percentage rate, or APR.

How do I transition to an unsecured credit card?

Eventually you may decide you want to cancel your secured card because you now qualify for unsecured cards. In that case, what happens to the money you deposited to open your secured card? Once you cancel your secured card, your deposit likely will be sent back to you if you’ve paid off your balance in full.

Note that if you’ve made on-time payments over a set period, such as two years, some issuers may switch you to an unsecured card. This can sometimes happen without you even requesting it. On the other hand, some issuers will bump you up to an unsecured card only if you ask.

Garvey advises credit card holders to be aware of the whole picture when making decisions about their secured card. If you want your deposit back and aren’t able to convert your secured card to an unsecured card, “you may need to close the credit card account — which, in turn, reduces your credit availability and could lower your credit score.”

What are the drawbacks of a secured credit card?

Keep in mind that a secured card may come with an annual fee, along with an APR that’s higher than that of an unsecured card.

For instance, the Capital One® Secured Mastercard® carries a variable purchase APR of 26.99%. By comparison, the variable purchase APR for the Capital One® Venture® Rewards Credit Card ranges from 17.24% - 24.49%.

From our partner

Why may secured cards have higher APRs than unsecured cards?

“The reason is simple: A customer who isn’t creditworthy is higher-risk,” Garvey says, “and therefore the customer typically pays a premium to establish or rebuild credit.”

Bottom line

While secured cards generally require a deposit and may not offer the best APRs, these cards can be helpful if you’re having trouble getting approved for a traditional credit card. Using a secured card can help you establish credit or improve your credit health, which in turn may help you qualify for an unsecured card in the future.