What Is A Secured Credit Card: Everything You Need To Know

What Is A Secured Credit Card: Everything You Need To Know

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Put simply, secured credit cards are products intended for people who have bad credit scores or have no score whatsoever. The term “secured” refers to the fact that these cards require a security deposit to be put down by the cardholder to open an account. This deposit is used as collateral in case the user does not pay off the purchases charged to the card. There are many more nuances to what secured credit cards are and how they can be used. The rest of this guide will focus on explaining these so that you may be better educated about this type of financial product.

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What Are Secured Credit Cards?

As we explained above, secured credit cards are a type of credit card that requires the user to put down a security deposit before opening. Most frequently, this security deposit will be equal to your credit line. For example putting down a $500 deposit will give you a $500 line of credit. The more of a security deposit you put down, the higher your credit limit will become. There are some exceptions to this rule. A select few secured credit cards allow you to put down a nominal security deposit, while giving you a significantly higher line of credit – we discuss one such card below.

Once you open your secured credit card and pay the deposit, you can use this card just like any unsecured credit card. You do not have to make additional deposits, unless you wish to extend your line of credit.

The deposit you put down for your secured credit cards can be returned to you if you close the account, and if you don’t owe anything to the lender. A few cards will also return the security deposit to individuals who made all their payments on time for some period of time – usually around 12 months.

Who Should Use Secured Credit Cards?

Secured credit cards are ideal for those consumers who have a bad credit score (FICO below 600), or no credit score whatsoever. These cards are, for the most part, worse than unsecured credit cards. Therefore there is no reason for someone with fair credit or better to apply for one. Even the best credit cards for those with bad credit don’t come close to the rewards of top rewards cards.

With a secured credit card, individuals can build or rebuild their credit score. Once you have an account, focus on making your payments on time and, in general, using your credit card responsibly. You can read our guide on “How To Build Credit” to find out more about how you can optimize this process.

When it comes to secured credit cards, it is crucial that users check whether their issuer reports secured accounts to the credit bureaus – TransUnion, Experian or Equifax. If they won’t report to at least one of these agencies, it defeats the purpose even having the account. Secured credit cards are not worth having if you aren’t using them to build up your credit score.

Secured vs Unsecured Credit Cards: What’s The Difference?

Functionally, there is no difference between secured and unsecured credit cards. Outside of the security deposit, they both operate the same way. You use both types of cards to make purchases throughout the month for which you get billed every 30 days. You can pay off your bill in full, or pay less and be charged interest.

Generally speaking, secured credit cards come with higher APRs than unsecured credit cards. That means they are worse for individuals who don’t pay off their bill at the end of each month. There are also fewer secured credit cards available with no annual fee.

Prepaid Debit Cards As An Alternative To Secured Credit Cards

Many people compare prepaid debit cards to secured credit cards, chiefly because they are both predominantly used by individuals with subprime credit scores. Both card types require you to deposit some amount of money, which then allows you to use card payments – something that is unavailable to anyone who only operates using cash. However, it is important to understand the two are not the same, and they carry very different implications for one’s credit.

Prepaid debit cards do not help build out your credit score. They are equivalent to having a checking account with a debit card. Because these are not loans, the accounts are not added to your credit report, like they are with credit cards. If your goal is to ultimately dig your way out of a bad credit situation, you should use secured credit cards instead of prepaid debit cards.

What Are Some Good Secured Credit Cards?

If it sounds like a secured credit card is something that you may be interested in, below you’ll find some good options that were vetted by our analysts. If you want to browse through more options, we recommend looking at our list of credit cards for bad credit.

Discover it® Secured

The Discover it® Secured is one of the few, rare secured credit cards with a rewards program. Users can get 2% cash back at restaurants and gas stations on up to $1,000 in combined purchases each quarter, and 1% back everywhere else. After 8 months with this card, you will be reviewed to see if Discover can transition you to an account with no security deposit. This card is currently our top pick for best secured credit card.

  • Minimum Security Deposit: $200

Capital One® Secured Mastercard®

Capital One® Secured Mastercard®
This product is not available through ValuePenguin.
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The Capital One® Secured Mastercard® is fantastic for those looking for some flexibility in their security deposit. The minimum amount needed to deposit is $49, $99,or $200, and for that amount you can get an initial credit line of $200 (you’ll need access to an authorized bank account to pay your deposit). This is different from most other secured cards, which typically provide credit lines at a 1:1 ratio with your security deposit. To get this flexibility, cardholders must be okay with sacrificing rewards. Unlike the card mentioned above, the Capital One® Secured Mastercard® doesn’t come with any extra bells or whistles.

  • Minimum Security Deposit: $49, $99 or $200 refundable minimum security deposit
  • Annual Fee: $0
Joe Resendiz

Joe Resendiz is a former investment banking analyst for Goldman Sachs, where he covered public sector and infrastructure financing. During his time on Wall Street, Joe worked closely with the debt capital markets team, which allowed him to gain unique insights into the credit market. Joe is currently a research analyst who covers credit cards and the payments industry. He earned a bachelor’s degree from the University of Texas at Austin, where he majored in finance.

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How We Calculate Rewards: ValuePenguin calculates the value of rewards by estimating the dollar value of any points, miles or bonuses earned using the card less any associated annual fees. These estimates here are ValuePenguin's alone, not those of the card issuer, and have not been reviewed, approved or otherwise endorsed by the credit card issuer.

Example of how we calculate the rewards rates: When redeemed for travel through Ultimate Rewards, Chase Sapphire Preferred points are worth $0.0125 each. The card awards 2 points on travel and dining and 1 point on everything else. Therefore, we say the card has a 2.5% rewards rate on dining and travel (2 x $0.0125) and a 1.25% rewards rate on everything else (1 x $0.0125).