What is a secured card?

‍The gist: A secured card is a type of credit card that doesn’t require a high credit score but does require a cash deposit. The amount of the cash deposit is equal to the credit limit of the card.

A secured card is an easy way to build credit because to be eligible for one you don’t need an already-high credit score. Secured cards do, however, require a cash deposit.

Traditional financial institutions and card issuers generally require a deposit of about $200, with some challenger banks and fintechs offering secured cards with no minimum deposit. With the cards that require $200, when you make a purchase you aren’t spending the $200 deposit. Instead, you’re using a $200 line of credit and must repay what you’ve spent when the monthly bill arrives, just as you would with a normal credit card. For the cards with no minimum deposit, the amount you can spend will be equal to whatever amount you can afford to load onto the card.

Example: You load $200 onto the secured card and then make a purchase for $160. At the end of the month you will need an extra $160 to pay off the card. The original $200 remains untouched.

The more you load onto your deposit, the greater your line of credit. This is different from a debit card which just pulls cash from your account as you spend. 

One of the biggest benefits of a secured card is that regular, on time payments will improve your credit score. 

What is a secured card?

A secured card uses your cash deposits as collateral for the line of credit. This collateral is what guarantees, or secures, your ability to pay off the debt. The card issuer reports your repayment activity to credit reporting agencies which makes this kind of card a great way to improve your credit score or start building credit.

Once you’ve put down cash as collateral it is no longer accessible. It stays in reserve. If you decide to cancel the card the deposit is returned as long as your balance is paid in full and you haven’t defaulted or missed payments. 

In some cases the card issuer will offer to convert a secured card to a normal credit card after you’ve established a history of on time payments. Once they convert the card, they return the deposit. 

Secured cards have an annual percentage rate (APR) which is the yearly interest rate you’ll pay if you carry a balance. “Carrying a balance” means that you haven’t paid at least the minimum payment off your bill each month. This is important because, depending on the APR percentage, the cost of carrying a balance can add up. Even though the percentage is an annual (yearly) rate, the issuer will charge the interest monthly. Also, some credit cards have variable APRs, which means your rate can go up or down over time.

What are the benefits of a secured card?

Ease

You can jump-start your credit profile with a secured card. In some cases, the process is as easy as linking the card to a bank account, depositing funds, and using the card for purchases within the credit limit.

Accessibility 

A secured card can be a great alternative if a regular credit card is still out of reach. You can usually get a secured card without having to meet the high credit score requirements that normal credit cards demand.

Security

The credit limit being backed by a deposit helps you manage spending by preventing overuse. As long as the monthly payments are on time and in full, the user will avoid the kinds of missteps that might happen with a normal credit card. 

Credit

In most cases, it takes 6 months to a year of using a secured card responsibly to see meaningful increase in a credit score. From there you can usually start applying for a regular, unsecured, credit card.

What are the drawbacks of a secured card?

Minimum deposit

Most secured cards offered by larger financial institutions require a deposit of at least $200. This can be a barrier for those who don’t have $200 to leave tied up in an account.

High APR

Secured cards often have a high APR. This makes using one expensive if you don’t make the right payments. The average APR on a secured card is about 26%. 

Limited Spending

You cannot spend more than the total of the deposit you’ve made. For most people this will limit the kinds of purchases that can be made.

Extra Fees

Some secured cards charge maintenance fees or annual fees which add to the already high cost of a big APR.

How is a secured card different from a credit card?

For many, a secured card is a step towards owning a regular credit card. 

The secured card helps you spend within your means because the credit limit is essentially prepaid. This creates a security blanket that protects both you and the issuer. 

This doesn’t mean that a secured card will always lead to an improved credit score. But it does greatly improve the chances of a higher score because the card restricts spending beyond what the deposit allows.

Generally, there are four key differences between a secured card and a credit card:

1.  Qualification

Qualifying for a secured card is usually easier than qualifying for a normal credit card. Why? Because a normal credit card, also called an unsecured credit card, is not backed by collateral from the card holder. This means that the company issuing an unsecured credit card takes on more risk. In contrast, the secured card issuer knows that they have your cash on reserve. Therefore they are exposed to less risk and are more willing to offer the card. 

2.  Collateral

A secured card requires a cash deposit that equals the credit limit. The deposit is held as security by the issuer. An unsecured credit card doesn’t require collateral.

3.  Credit 

With a traditional credit card, the issuer determines the credit limit based on the cardholder's credit history, income, and other factors. It is not based on a cash deposit like it is with a  secured card.

4.  Cost

Secured cards often have higher fees and interest rates than traditional credit cards. This is because secured card holders are typically working on repairing their credit score or establishing a credit score because they have little or no credit history. This low/new credit score means that card issuers consider the card holder to  be a higher risk, and offset this risk with higher fees and interest rates.

What can I use a secured card for?

You can use a secured card wherever credit cards are accepted including online. This means you can start using a secured card right away for travel, shopping, and dining. 

You can also use a secured card to build credit or restore a poor credit score. In most cases the deposit can be as little as $200 and as much as $2,500. This means that as soon as the deposit is complete you can start to establish a track history of responsible credit use which will eventually lead to a good credit score. 

A good credit score will make it easier to apply for loans in the future. It will also make it easier to get a mortgage. The higher your score, the lower the interest rate you’ll have to pay which makes borrowing less expensive. 

Some secured cards also offer important benefits like:

• Cashback on purchases
• No minimum balance 
• No annual fees
• No credit checks