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Secured credit cards can be valuable tools for building or repairing your credit history. They require an upfront deposit that sets your credit limit, which acts as insurance for the card issuer if you can't make payments.
Even though they may have higher fees and fewer rewards, they're easier to get if you have a low credit score or no credit history. Just like a regular card, you can use a secured card for purchases, but the lower limits can help keep your spending under control. If you're new to credit or trying to bounce back from financial hardships, a secured credit card might be right for you.
KEY TAKEAWAYS
- Secured Credit Cards require an upfront deposit, aiding those with low or no credit to build or repair their credit history while providing controlled spending limits.
- While both Secured and Unsecured Cards build credit, unsecured cards rely on creditworthiness without deposits. In contrast, secured cards have deposit-based limits and often higher fees.
- Assess credit experience, rebuilding needs, past card denials and deposit affordability when considering a secured card.
What Is a Secured Credit Card?
Unlike a regular or "unsecured" credit card, a secured credit card requires you to provide a security deposit upfront. This deposit acts as collateral insurance for the card issuer in case you can't make your credit card payments.
Beyond that, a secured credit card functions similarly to any other card. You use it just like a regular credit card — for purchases, bills and other transactions. You then get a monthly statement that you should pay off to avoid interest charges. The main difference is what happens if you can't pay your bills. If that happens, the card issuer uses your deposit to cover the unpaid balance.
Secured Card vs. Unsecured Card
Unlike a secured credit card, an unsecured credit card is a standard card that doesn't require a security deposit and relies solely on your creditworthiness — your credit score and history — for approval. This feature can make unsecured cards harder to obtain for those new to credit or with past financial missteps.
Some of the differences between secured and unsecured credit cards include:
- Security Deposit: A secured card requires a deposit that serves as collateral, providing a safety net for the issuer. The deposit could range from under a hundred dollars to a few thousand. In contrast, unsecured cards don't require a deposit.
- Credit Limit: For secured cards, the deposit typically determines your credit limit. Most issuers offer a limit equal to your deposit, although getting a larger limit with some issuers is possible. However, unsecured cards rely on your income and credit history to set your limit.
- Credit-Building: Both types of cards can help you build or rebuild your credit. It's important to check that your secured credit card reports your account activity to the three major credit bureaus to make it count in building your credit score.
Comparing secured and unsecured credit cards side by side can help you find the right card for you:
Comparing Secured and Unsecured Credit Cards
Comparison Factor | Secured Credit Card | Unsecured Credit Card |
|---|---|---|
What is it? | A credit card that you need to put down a deposit for. The amount you deposit usually becomes your credit limit. | A regular credit card with no deposit. Approval is based on factors like your credit report and income. |
Why would you use it? | To build a good credit history or fix a bad credit score. | For everyday spending and sometimes getting rewards or perks. It also helps you build a good credit history. |
Do you need to deposit money first? | Yes, you usually deposit an amount equal to your credit limit. | No, you don't need to put down a deposit. |
How much can you spend? | Usually, the amount you deposited, although some issuers may offer a higher credit limit. | The issuer determines your credit limit based on income and credit score. |
Does it have high interest and fees? | Typically higher than with unsecured cards. | Typically lower, but can be high depending on the card and your creditworthiness. |
Can you get rewards and perks? | Not usually, though some have limited rewards. | Yes. You can get rewards like cash back or travel points and other benefits like purchase protection, cell phone or travel insurance or complimentary third-party memberships. |
What credit score do you need? | None. You can get one with bad credit or even no credit history. | Usually, a fair to excellent credit score. |
What does it do to your credit score? | Using it responsibly can help you build or fix your credit score. | It can help you build a good credit score if you use it responsibly. |
What's the risk? | There's a lower risk because you can't spend more than you deposit. | Higher, because you can spend more than you can afford to pay back. |
Is it easy to get? | Generally, yes. It's often easier to qualify for than an unsecured card. | It's usually harder to qualify for, as issuers evaluate your creditworthiness. |
Pros and Cons of Secured Credit Cards
A secured card operates like a regular credit card, with a few key differences. Consider the pros and cons of a secured credit card before applying.
Pros of Secured Credit Cards
Credit Building Tool
If your credit report isn't great or you don't have any credit history at all, a secured credit card can help you build up your credit by reporting your responsible account activity to the three major credit bureaus.
Easier Approval
Even if your credit score is low, you can still get a secured credit card. Since your deposit is used as collateral for your account, reducing risk for the issuer, the approval process is generally more straightforward.
Controlled Spending
With a secured credit card, you can only spend up to the amount you've deposited. This can be a helpful boundary if you're learning about managing your spending or have a history of spending beyond your means.
Security Deposit Refund
Once you show a track record of responsible credit card use and have proven you can manage credit well, you can typically upgrade to an unsecured card and get your deposit back.
Cons of Secured Credit Cards
Requires Money Upfront
You need to make a deposit to get a secured credit card. This can range from under a hundred dollars to a few thousand.
Lower Credit Limit
Your credit limit is often equal to your deposit, so you may not have much spending power.
High Interest and Fees
Secured cards often have higher interest rates and more fees than unsecured cards, meaning missteps or missed payments can cost you much more.
Fewer Perks
While it's possible to get standard perks, like a basic rewards rate or a small welcome offer, you usually get a few rewards or benefits with a secured card.
Is a Secured Credit Card Right for You?
Determining the right credit card for you depends on various factors, including your financial circumstances, objectives and past credit behavior. Ask yourself these questions to help decide if a secured credit card is your best option:
- Are you new to credit? For those who haven't had the opportunity to build a credit history, a secured card can serve as an excellent launching pad. It allows you to begin establishing a track record of responsible credit usage.
- Are you looking to rebuild your credit? If past financial missteps have impacted your credit score, a secured card could be the lifeline you need. Making on-time payments and maintaining a low balance can improve your creditworthiness.
- Have you had trouble getting approved for an unsecured card? A low credit score or a lack of credit history might result in denials for unsecured cards. In these cases, a secured card, with its generally easier approval process, can provide an alternative path to building credit.
- Are you able to afford the security deposit? The security deposit is a key factor to consider with secured cards. Be sure you can comfortably afford this upfront deposit without depleting your emergency funds or causing financial stress. It's about balancing your immediate financial health with your long-term credit goals.
Final Thoughts
Secured credit cards are valuable tools, especially for those new to credit or working to improve their credit history. They're often easier to get approved for and can help control spending habits. However, they do require an upfront deposit, have typically lower credit limits and may come with higher fees. The decision to opt for a secured credit card depends on individual financial circumstances and goals. How you use the card will shape your credit journey. Responsible usage is the key to graduating to an unsecured card and building a stronger credit score.
FAQs
While our main article covers the essentials of secured credit cards, we understand that you might still have specific questions. To address these, we've compiled a set of additional FAQs below, tackling topics that weren't directly touched upon earlier.
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*Rates, fees or bonuses may vary or include specific stipulations. The content on this page is accurate as of the posting/last updated date; however, some of the offers mentioned may have expired. We recommend visiting the card issuer’s website for the most up-to-date information available.
Editorial Disclosure: Opinions, reviews, analyses and recommendations are the author’s alone and have not been reviewed, endorsed or approved by any bank, credit card issuer, hotel, airline, or other entity. Learn more about our editorial policies and expert editorial team.
Advertiser Disclosure: MoneyGeek has partnered with CardRatings.com and CreditCards.com for our coverage of credit card products. MoneyGeek, CardRatings and CreditCards.com may receive a commission from card issuers. To ensure thorough comparisons and reviews, MoneyGeek features products from both paid partners and unaffiliated card issuers that are not paid partners.
Editorial Disclosure: Opinions, reviews, analyses and recommendations are the author’s alone and have not been reviewed, endorsed or approved by any bank, credit card issuer, hotel, airline, or other entity. Learn more about our editorial policies and expert editorial team.
Advertiser Disclosure: MoneyGeek has partnered with CardRatings.com and CreditCards.com for our coverage of credit card products. MoneyGeek, CardRatings and CreditCards.com may receive a commission from card issuers. To ensure thorough comparisons and reviews, MoneyGeek features products from both paid partners and unaffiliated card issuers that are not paid partners.