Secured Credit Cards Explained: How They Work and When to Move On

A secured credit card works like any other credit card at the checkout, but you provide a refundable cash deposit when you open the account. The deposit protects the issuer if you do not pay, which is why secured cards are available to people with no credit history or a damaged one.

What the deposit does

Your deposit usually equals your credit limit: a deposit of a few hundred dollars typically means a limit of the same amount. The deposit is not used to pay your monthly bill. You still receive a statement, owe at least the minimum payment and pay interest on any balance you carry. The deposit is returned when you close the account in good standing or when the issuer moves you to an unsecured card.

How a secured card builds credit

Most secured cards report your account to the major credit bureaus every month. The factors that matter most are the same as for any card:

• Payment history. Paying on time every month is the single most important habit.
• Utilization. Keeping your balance low relative to a small limit shows that you are not relying heavily on credit.
• Account age. The longer the account stays open and in good standing, the more it helps.

Before you apply, confirm that the card reports to all three major bureaus. A card that does not report will not help your credit.

Fees to compare

Secured cards range from no annual fee to cards with annual, monthly or setup fees. Fees reduce the money available on your card and add to your costs without helping your credit, so a low-fee card is usually the better choice. Also compare the regular APR, which is often higher than on standard cards.

Graduating to an unsecured card

Some issuers periodically review secured accounts and can upgrade you to an unsecured card and return your deposit after a period of responsible use. Others require you to apply for a new card. Ask about the issuer’s graduation policy before you open the account, because it determines how easily you can move on.

Is a secured card right for you?

A secured card makes sense if you cannot qualify for an unsecured card, or if you want a low-risk way to build a credit history. If you are a student, a student card may be an alternative. Either way, treat the card as a tool: small purchases, paid in full, every month.