If you have a limited credit history or bad credit, it can be difficult to get approved for popular credit cards. Secured credit cards can be an alternative to help you build good credit through responsible use. These cards are typically easier to get approved for because you deposit money into an account and receive a credit limit equal to your deposit. And if your credit improves over time, you could become eligible for credit cards with better rewards and benefits.
In this article, we'll discuss what is a secured credit card, how it works, how to choose one, and who it’s best for.
How a secured credit card works
A secured credit card acts just like a regular credit card except that your credit limit is generally secured by a cash deposit with the bank. Most secured credit card limits are equal to the money you deposit. Because the bank has your money as collateral in case you don't pay your bill, you might be more likely to get approved for a secured card, even if you’re building credit or you have poor credit from past mistakes.
Once you are approved for your secured credit card, the credit card company will typically require that you make a security deposit before your credit card is issued. Some banks will allow you to deposit more money in order to receive a higher credit line when your account is first opened. With responsible use of your secured credit card, the bank may eventually increase your credit line without requiring a higher security deposit or convert your account to an unsecured credit card and refund your security deposit.
Unsecured credit card vs. Secured credit card: 5 differences
Although unsecured credit cards and secured credit cards are similar, they have several important differences. In general, secured credit cards have lower credit limits, accept applicants with lower credit scores, and offer fewer perks and rewards.
1. Credit limits
Credit limits for secured credit cards tend to be lower than what you’d see with traditional credit cards. Secured credit card limits typically are equal to the amount that you deposit with the bank. In most cases, this means that the starting credit limit is $200 with a $200 refundable security deposit.
By comparison, unsecured credit card limits are based on your credit history and annual income. Most secured credit cards have a line of credit of $5,000 or lower. This makes sense because the typical consumer might not have that much cash to tie up as a security deposit for an unknown period of time.
2. Credit score requirements
Because the credit limit for a secured credit card is tied to the amount on deposit, banks might be willing to approve applicants with limited or poor credit. Although many unsecured credit cards might require a good FICO score of 670 or higher for approval, secured credit cards might approve applicants with FICO scores as low as 350.
3. Credit card perks and rewards
Although credit card perks and rewards are nice to have, when someone applies for a secured credit card, the primary focus is to rebuild their credit. Therefore, most secured credit cards have minimal credit card perks and rewards compared to unsecured credit cards.
Common credit card perks with secured credit cards are free access to your FICO score, credit limit increases with on-time payment history, and reporting to all three credit bureaus — Transunion, Experian, and Equifax. And although earning rewards with a secured credit card isn’t common, there are a handful of cards that do earn rewards, such as the Discover it Secured card. The SKYPASS Visa Secured Card also offers a welcome bonus of 5,000 bonus miles after your first purchase.
4. Interest rates
Financial institutions generally assign interest rates based on a customer's creditworthiness. Those with the highest credit scores often receive the lowest interest rates. If you have negative marks on your credit report, this generally leads to higher rates. However, because the bank has your security deposit in case of a late payment or default, a secured credit card may have lower interest rates than an unsecured credit card for people with fair credit.
Fees are one of the major issues with credit cards targeted to those with bad credit or a limited credit history. Credit card issuers often charge these customers a wide array of fees, such as an annual fee, monthly fees, application fees, and more. When choosing a secured credit card, look for reputable banks that minimize the fees you have to pay.
Who could benefit from a secured credit card?
Secured credit cards are generally best for people who are just starting out on their credit journey and those who want to rebuild their credit. Both of these customer types may have difficulty getting approved for an unsecured credit card and may need to start out with a secured credit card to build their credit history. Here are a couple of examples of people who could benefit from a secured credit card.
As a young adult, you might not have much credit history for a bank to review. Because of that, many banks will not approve you for an unsecured credit card because they are unsure of how you will handle credit. By applying for a secured credit card, you could build a positive credit history of on-time payments and responsible use of your credit limit. This might help you get approved for other cards in the future.
Those with a limited or poor credit history
When you have negative marks on your credit report, a secured credit card might help you counter them as you make on-time payments in full. Once your secured credit card is open, paying your account on time and keeping your balance low relative to your credit limit could boost your score over time. Eventually, the negative marks might fade and the responsible use of your secured credit card could show lenders you are ready for an unsecured credit card.
How to choose a secured credit card
When choosing a secured credit card, you want a card that will help to improve your situation, not one that will make things worse. Although these cards don't offer the same attractive perks as many of our favorite cashback or travel rewards credit cards, many do offer benefits that are worthwhile. Here are a few of the secured credit card features you should pay attention to when reviewing your options:
- Free access to your FICO score: Viewing your credit score can help you keep track of your progress towards your goal of improving your credit.
- Reports to all three major credit bureaus: Make sure the credit card account offers regular credit reporting to all three bureaus so you get credit for your positive payment history.
- Compare card perks and fees: Look at the fees associated with the card and whether the same benefits are available from another credit card that doesn't charge an annual fee.
- Automatic credit limit increases: Some banks offer automatic credit limit increases if you make all of your monthly payments on time and avoid late payments. Look into whether this is a possibility.
- Upgrades to a traditional unsecured credit card: Some banks also offer the opportunity to upgrade to an unsecured credit card if you use your secured card responsibly over time. If this is important to you, look into it as you compare cards.
The best secured credit cards
|Card name||Minimum credit limit||Maximum credit limit||Recommended credit score|
|Citi Secured Mastercard||$200||$2,500||Good, Fair|
|Secured Mastercard from Capital One||$200||$1,000||Bad, Poor|
|Discover it Secured||$200||$2,500||Fair, Bad|
Citi Secured Mastercard
The Citi Secured Mastercard offers a credit limit ranging from $200 to $2,500, based on your security deposit amount. Unlike prepaid cards, this is a real credit card that reports to all three credit bureaus. It includes free access to your credit score to monitor your progress, and it has a $0 annual fee.
Secured Mastercard from Capital One
Unlike other secured credit cards, the Secured Mastercard from Capital One offers a credit limit of $200 with a security deposit as low as $49. You also have the option to make additional deposits to increase your credit limit up to the maximum of $1,000. Plus, you're automatically considered for a credit limit increase in as few as six months and your security deposit may be returned if you manage your account responsibly. This $0-annual-fee-card is one of the few secured credit cards with no foreign transaction fees.
Discover it Secured
Although building your credit score with the Discover it Secured Credit Card, you can earn 2% cash back on purchases at restaurants and gas stations (up to $1,000 quarterly), and 1% cash back on all other purchases. Plus, Discover matches all your cash back earned in your first year as a cardholder.
This secured credit card offers a minimum credit limit of $200 with a $200 refundable deposit for cardholders. The maximum credit limit is $2,500, based on your income and ability to pay your bills. And starting at eight months, Discover will automatically review your account for conversion to an unsecured card. The card has no late fees for your first payment, a $0 annual fee, and no over-the-limit fees or foreign transaction fees.
Can secured credit cards help you build credit?
Yes, the responsible use of your secured credit card can help you build credit as long as the bank reports your behaviors to the credit bureaus. To create a positive credit history, be sure to pay your bills by the due date each month and keep your balances low compared with your credit limit.
Do you get your deposit back with a secured credit card?
Most secured credit cards offer a refundable security deposit. This means you'll receive your security deposit back when you close the account with a zero balance or when your card gets upgraded to an unsecured credit card.
Can you be denied a secured credit card?
Yes, although a secured credit card can be a lower risk for a bank because it requires a security deposit, that does not mean that every application is approved. Banks review each application individually when making credit decisions.
What's the difference between a secured credit card and a prepaid debit card?
While prepaid debit cards can be useful in helping to stay within your budget, they do not help build your credit history. Prepaid debit cards don’t report to the three credit bureaus and are usually not tied to any one specific person’s credit. A secured credit card is linked to your Social Security number, and this type of card may increase your credit score over time if your account remains in good standing.
The bottom line
Secured credit cards can be an excellent way for people with a limited credit history or bad credit to help improve their credit score with responsible use. These cards typically offer a credit limit that matches the amount of your security deposit. Over time, many card issuers may increase your credit limit or convert your account to an unsecured card when you pay your bills on time and manage your card responsibly.
There are many options to choose from, so check out our picks for the best secured credit cards to compare the pros and cons of each card and find one that works best for your personal situation.