Think you need perfect credit to qualify for a credit card? Think again. A secured credit card can establish or rebuild your credit no matter where your financial health stands.
Struggling to qualify for a credit card or just starting to build your history? A secured credit card is a simple, effective way to take control of your finances and establish a solid credit foundation. Whether you’re rebuilding after past mistakes or just getting your feet wet and don’t know where to start, this is a low-risk first step in proving you’re responsible with credit.
If you’re still new to all this, you’re in the right place! We’ll break it down and show you how it works so you can open doors to new financial opportunities.
What is a Secured Credit Card?
A secured credit card functions similarly to an unsecured credit card but requires an upfront refundable cash deposit, which becomes your credit limit or the amount you’re approved to borrow. This deposit is kind of like a down payment that reduces the risk for the lender and helps those with no credit or low credit to establish or repair their credit history.
Secured credit cards provide a simpler way to establish credit when other options may not be available. As long as you make payments on time, you can improve your standing and eventually get approved for a regular credit card.
What are Secured Credit Cards For?
Secured credit cards are designed to lower barriers to credit access for those who have made financial mistakes or never had credit before. Irresponsible credit usage can hurt your credit history and put you in debt, but avoiding credit altogether can be just as harmful, as this won’t build you a healthy credit history.
Without a credit history, it’s much harder to qualify for loans, get a job, or rent an apartment. Your credit history shows lenders, employers, and landlords that you have a track record of responsible money management and making on-time payments. That’s why it’s better to learn to use tools like secured credit cards wisely instead of avoiding credit usage completely.
Credit tools like secured (and unsecured) credit cards set the foundation for financial independence down the road when you know how they work and use them wisely!
How Do Secured Credit Cards Work?
So, how does a secured credit card work? Let’s say, for example, you’re a recent college graduate with no credit history and you get denied a traditional credit card, so you apply and get approved for a secured card. You will then pay a security deposit for the card, like $300 for example, which effectively becomes this credit card’s credit limit.
This security deposit acts as the collateral provided to access this $300 credit limit. If one day you close this credit account, this security deposit is generally returned to you, much like how a security deposit for an apartment works.
Once you’ve made your security deposit, you can start to use the secured card for small purchases and pay it off in full each month. If you don’t make timely repayments, the deposit kicks in to pay for the unpaid balance.
After a year or so of responsibly using this secured credit card and making on-time payments in full, your credit history and credit score will improve!
Who are Secured Credit Cards For?
A report by PYMNTS Intelligence revealed that the best candidates for secured credit cards are “credit outsiders” and young consumers looking for “a controlled entry into the credit market.”
Secured credit cards can be great for people in any of the following situations:
- “Credit Curious” First-Timers: Young adults or students with no credit history who need a way to start building credit.
- Credit “Second Chancers”: Those recovering from financial setbacks, such as missed payments or bankruptcy, who want to improve their credit score.
- Anyone Denied for an Unsecured Credit Card: If traditional credit cards aren’t an option due to low or no credit, a secured card can be a helpful stepping stone.
- Those Looking to Develop Better Credit Habits: If managing debt has been a challenge in the past, a secured card provides a controlled way to practice responsible credit use.
If you think a secured credit card might be the right financial tool for you, the next step is to ensure your eligibility.
Secured Credit Card Eligibility Requirements
Secured credit cards are meant to be accessible to individuals with limited or damaged credit, but you’ll still need to meet some minimum requirements.
Must Be 18 or Older
You must be at least 18 years old to apply for a secured credit card. If you don’t have a verifiable income, the card provider might require you to be 21.
Verifiable Income
Most issuers want to see you have a steady income to manage your payments. You don’t need a high-paying job, but you’ll likely need to provide proof of employment through bank statements or paystubs.
Security Deposit
Upfront security deposits are a key secured card feature that typically ranges from $200 to $500+, depending on the card. You must have the funds available to pay the deposit before applying for the card. This deposit acts as your credit limit.
US Citizen or Legal Resident
Most secured credit cards are only available to U.S. citizens and legal residents. You may need to provide documentation like a Social Security number (SSN) or Individual Taxpayer Identification Number (ITIN) to verify your status.
No Recent Bankruptcy or Delinquent Accounts
Some card issuers may have restrictions if you’ve recently filed for bankruptcy or have unresolved collection accounts. Other issuers may be more lenient with these factors, but it’s always best to check the card’s specific requirements.
Credit Check
Secured credit cards are easier to qualify for than unsecured ones, but most issuers will still perform a soft credit check to determine your eligibility. A soft pull doesn’t affect your score, but it gives them a general idea of your credit history.
Secured Credit Cards vs Unsecured Credit Cards
When choosing a credit card, you’ll come across offers for secured and unsecured cards and may want to know the difference. In short, both offer the ability to borrow money and build credit, but they have a few key functional differences to know about.
Security Deposits
- Secured Credit Cards: Required upfront as your credit limit. Amount varies among issuers.
- Unsecured Credit Cards: No deposit is needed. If you don’t make payments, the issuer has no security deposit to fall back on and may charge you interest or late fees instead.
Credit Limits
- Secured Credit Cards: Your credit limit is defined by your initial deposit — so if you deposit $500, that’s the amount you can use. This limit is usually lower than what you could get with an unsecured card.
- Unsecured Credit Cards: Credit limits on unsecured cards tend to be higher and based on your credit history and income. You may be offered a higher credit limit immediately if you have a good credit profile. Over time, unsecured cards may allow you to increase your limit without requiring a deposit.
Eligibility Requirements
- Secured Credit Cards: Easier to qualify for with no credit history or poor credit. You'll most likely get approved if you have the required security deposit.
- Unsecured Credit Cards: Require a stronger credit history for approval. To determine eligibility, lenders look at your income, debt-to-income ratio, and credit score.
Impact on Credit Score
- Secured Credit Cards: Keeping your secured card balance low and paying on time can help you build or rebuild your credit. The card issuer reports your activity to the credit bureaus, which can positively impact your score over time.
- Unsecured Credit Cards: These also help build credit, but since they’re typically issued to individuals with better credit, they may have a more immediate positive impact on credit when used responsibly.
Fees and Interest Rates
- Secured Credit Cards: These sometimes have higher annual and/or monthly maintenance fees, especially for those with limited or poor credit. Interest rates may also be higher than those of unsecured cards, depending on your creditworthiness.
- Unsecured Credit Cards: These can also have annual fees but may offer more competitive interest rates than secured cards, especially if your credit is in good shape. Some unsecured cards also offer rewards like cashback and other perks.
Is a Secured Credit Card Right for Me?
A secured credit card can be a valuable tool for many, but there are still situations where it might not be the best option. Here are some questions to ask yourself in making that determination. If any of the questions below give you pause, you may want to think twice before applying and explore other options instead.
Can You Afford the Security Deposit?
The secured credit card security deposit required can range from $200 to $500 or more. If you don’t have the funds available for the deposit, this type of card might not be a feasible choice for you at the moment.
Do You Have Problems Managing Credit Responsibly?
If you have a history of overspending or struggle with managing credit, a secured card may not solve your financial problems. Not sure if you can handle it responsibly? Consider working on your budgeting skills first. You can also practice responsible spending and saving with a Netspend Prepaid Card from Check City.
Do You Have Existing Credit Card Debt?
If you already have credit card debt, it might be better to focus on reducing your existing debt than adding a new credit account to manage.
Do You Need Credit Right Now?
If you don’t have any immediate need for credit and aren’t worried about building or rebuilding your credit score, a secured card probably won’t be of much use to you. There are other ways to build or maintain credit when the time is right.
Are You Looking for Instant Access to Higher Credit Limits?
A secured credit card isn’t the right tool if you’re looking for immediate access to a line of credit larger than a few hundred dollars. With these cards, you’ll have to provide a deposit equal to the credit limit you’re looking for. If you don’t have that amount of cash available, you can still get a smaller limit, but you won’t get access to higher limits unless you increase your deposit or upgrade to an unsecured card.
If you have immediate needs for a slightly higher line of credit, it may be worth considering other options, such as a payday or installment loan.
How to Choose a Secured Credit Card
You’ll find that you have a world of options with secured credit cards, which can make it overwhelming to choose your first one. Let’s look at some of the factors to find in a card so you can have the best experience.
1. Low or No Fees
Some secured cards charge annual fees, account setup fees, monthly maintenance fees, and more. Look for a card with the fewest and lowest possible fees so you don’t pay more than necessary.
2. Reasonable Security Deposit
Secured credit cards require a deposit. For most cards, the amount starts at $200 — but you can choose to deposit more if you want a higher credit limit. Opt for a card with a minimum deposit amount you can comfortably afford.
3. Reports to All Three Credit Bureaus
You also need a card that reports your payments to Equifax, Experian, and TransUnion. This gives you the assurance that the card will help you improve your credit score over time.
4. Path to an Unsecured Card
After a few months, some secured credit card issuers will look at your account and offer to upgrade you to a regular (unsecured) credit card without any additional effort on your part. At this point, you can usually get your initial deposit back and move forward without the hassle of setting up a new credit account.
5. Extra Perks
While secured credit cards aren’t necessarily known for offering big rewards, some offer small cashback bonuses or fraud protection. These perks can be a nice bonus but shouldn’t be a main deciding factor in the card you choose.
How to Use a Secured Credit Card Responsibly
It’s understandable if you’re feeling apprehensive about getting and using your first secured credit card. But with a little knowledge under your belt, it can actually be pretty easy. Here are some guidelines to stick to if you’re still learning to manage credit.
1. Pay Your Balance in Full and On Time
Payment history is the biggest component of your credit score, which is why you should pay the minimum payment or more by each month’s due date. However, it’s most ideal to pay your entire monthly balance off each month to avoid interest charges, which get increasingly higher as your outstanding balance grows. Setting up automatic payments is a great way to stay on track.
2. Keep Your Credit Utilization Low
Credit utilization is how much of your credit line you’re using as a percentage. A financial rule of thumb is to utilize 30% or less of your credit. For example, if your credit limit is $300, try not to carry a balance over $90.
3. Use It for Small, Regular Purchases
A secured credit card is a tool to build credit, not a way to take on debt — so try not to spend beyond your means. Use it for everyday purchases like gas or groceries, then pay off the balance as soon as possible.
4. Avoid Cash Advances and Unnecessary Fees
Some secured credit cards allow cash advances, which let you pull cash out at an ATM using your credit card and borrow against your credit line. Try to avoid cash advances, as they usually come with high fees and interest rates. Also, be mindful of annual fees or late fees that could increase your expenses in the long term.
5. Monitor Your Credit Score
No matter where your credit stands, you should always be keeping tabs on your credit score and tracking your progress so you know how to improve or maintain it. Watching your score improve can help you stay motivated and adjust as needed. Many secured cards make this easy by offering free credit monitoring tools.
6. Upgrade to an Unsecured Card When Ready
After several months of responsible use, many secured credit cards will upgrade you to an unsecured card. Once your credit improves, consider upgrading to get your deposit back and access better credit terms.
If you’re diligent about following these tips, secured credit cards will help you build a stronger financial future.
How Fast Does a Secured Card Build Credit?
A secured credit card can boost your score in as little as three months, depending on several factors, such as:
- On-Time Payments: Paying your credit card bill on time each month is the fastest and most impactful way to build credit. This category makes up 35% of your overall score! Late or missed payments can slow or reverse your progress.
- Low Credit Utilization: The amount of credit you use is the next-biggest credit factor, making up 30% of your score. Keep your balance below 30% of your credit limit to show responsible usage.
- Length of Credit History: Older lines of credit positively impact your score, so the longer your responsible credit card usage, the better. Even if you decide to upgrade to an unsecured card down the road, it’s a good idea to leave your secured account open and make occasional purchases so the issuer doesn’t close the account.
- Credit Mix & New Credit: If your secured card is your only credit account, your score may rise gradually at first. Over time, you can start to incorporate a mix of different credit types, like loans, as your credit score grows, as these can diversify and boost your credit faster.
Plan on using your secured card responsibly for at least a year to build strong credit.
Steps to Applying for a Secured Credit Card
Applying for a secured credit card is usually a straightforward process, but following these steps will help you choose the right card and get approved:
1. Check Your Credit Score
Even though secured cards are designed for people with low or no credit, knowing your credit score can help you understand your starting point and track your progress over time. Many banking apps and credit monitoring services let you check your score for free. The major credit bureaus also offer one free credit report each year.
2. Compare Secured Credit Card Options
Take the time to explore your options instead of jumping on the first one you find. You may discover one that works better for you than others. Look for a card with low fees and reasonable deposit requirements that reports to all three credit bureaus. As a bonus, consider perks like cashback rewards or the ability to upgrade to an unsecured card later.
3. Determine Your Deposit Amount
Take inventory of your finances and decide how much you can afford to put down for a secured credit card deposit. A reasonable amount gives you a manageable credit limit while leaving you with enough savings for unexpected expenses.
4. Gather Required Information
The card application process will require you to provide the following information and documents, so be sure to track them down in advance and have them ready when you apply for your new secured card:
- Social Security number (or Individual Taxpayer Identification Number)
- Proof of income (to show you can afford payments)
- A U.S. bank account to fund your security deposit
5. Apply Online or In Person
Most banks and credit card issuers let you apply online in just a few minutes. If approved, your security deposit is required before the issuer provides the card.
6. Wait for Approval and Receive Your Card
While some issuers approve you for a secured credit card instantly, others may take a few business days. You should get your card in the mail within a week or two of getting approved.
7. Activate and Start Using Your Card Responsibly
Activate your card as soon as you receive it and start using it for minor and more manageable purchases. Make on-time repayments to make sure these purchases benefit your credit.
When to Upgrade From a Secured to an Unsecured Credit Card
Upgrading to an unsecured credit card is an exciting milestone in your credit progression. It means you’ve successfully demonstrated responsible credit management and marks financial growth. But when’s the right time to make the switch?
You’ve Built a Strong Credit History
If you’ve used your secured card responsibly for at least 6-12 months and consistently made on-time payments, your credit history might be solid enough to qualify for an unsecured card. Most issuers will want to see a history of responsible use before they offer it.
Your Credit Score Has Improved
Your credit score should be at least in the 600s to qualify for an unsecured card, though requirements vary by issuer. If you’ve been tracking your score and see steady improvement, you might be in a good position to apply for an unsecured card.
You’ve Kept Your Credit Utilization Low
Lenders like to see that you’re not maxing out your credit limits. If you’ve been consistently keeping your balance low (ideally under 30% of your credit limit), you’re showing that you can manage credit without overspending.
You’ve Received an Invitation to Upgrade
Some secured credit cards automatically offer an upgrade to an unsecured card after six to 12 months of responsible use. If you receive an offer from your card issuer, it’s a clear sign they’re ready to reward your responsible credit behavior.
You’ve Shown a Pattern of Timely Payments
Your payment history is one of the most critical factors in your credit score. If you’ve made all your payments on time and avoided late fees, this is a good indicator that you’re ready to transition to an unsecured card.
You’re Ready for More Flexibility
An unsecured credit card typically comes with more benefits than a secured card, including the potential for higher credit limits, lower interest rates, and better rewards programs. If you’re ready for these benefits and can handle more credit responsibly, an unsecured card could be the next step.
Any of these signs might indicate it’s time to apply for an unsecured credit card. Not only does it offer more financial freedom, but it also shows that you’ve taken the right steps in building a solid credit history. Just be sure to continue practicing good credit habits to maintain your score and keep improving your financial health.
Key Takeaways
Building credit is a journey that can open doors to greater financial freedom, and knowing what a secured credit card is is just the beginning. While a secured card can be an excellent temporary tool, the real power lies in the habits you develop, such as consistent payments, mindful spending, and a long-term approach to financial health.
