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What is a secured credit card?

UPDATED: June 19, 2018

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A secured credit card is a credit card offered by a bank or other credit company in exchange for, or secured, by collateral. While many credit cards require an individual to have an average or above credit score, a secured credit card can be acquired even when an individual has a poor credit history or no credit at all.

Benefits of a Secured Credit Card

A secured credit card arrangement can be a good way for someone to build or rebuild their credit history. However, a secured credit card is not unlike a regular, or unsecured, credit card. Like an unsecured credit card, a secured card has annual charges and fees. Further, these charges can often be higher than unsecured credit cards. Many secured credit card offers also require the purchaser to have a bank account, as well as impose age and income requirements. The best secured credit cards will allow the purchaser to eventually convert to an unsecured credit card, after they have established a period of timely payments. Someone who is interested in obtaining a secured credit card should be sure to shop around before they commit to a company.

Requirements for a Secured Credit Card and How it Works

In order to obtain a secured credit card, the purchaser must pay a deposit to the credit card company. This is security for the credit card company against unpaid balances. The credit card company will then issue the buyer a credit card with a credit line for anywhere from 50 to 100 percent of the amount of their deposit. For example, if a company offers you a credit line of 50 percent of the deposit you put down, a $500 deposit will get you a $250 credit line.

Some credit card companies may use the purchasers deposit for fees associated with the credit card, such as finance charges, annual fees, application fees and processing fees. You should be aware that cards with high fees can drastically reduce your deposit, and ultimately your credit line. Some credit card companies will not use your deposit unless you become severely delinquent on payments, and some will use it to cover a single late payment. Some companies will even give you interest on your deposit.

Secured Credit Cards and Your Credit Rating

Not all secured credit card companies report to the major credit bureaus. This means that you will not be able to establish any credit by using a card from these companies. Further, when inquiring about whether or not the secured credit card company reports to the major credit bureaus, you should make sure that the company does not report that it is a secured card as other lenders may judge your credit report by this information.

It is important to remember that secured credit cards are best used to build a good credit score. This means that you should only make small purchases that you can afford to repay. Acquiring a mountain of credit card debt right off is the worst thing you can do. Your spending habits will certainly affect your chances of obtaining an unsecured credit card.

Obtaining an Unsecured Credit Card

The best secured credit card companies will allow you to transition to an unsecured credit card once they see that you are responsible and have made all payments on time. However, even if you do obtain a card from a company that will not allow you to transition to an unsecured card, as long as you make timely payments, you will be able to acquire an unsecured credit card (from another company) eventually. 

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