What is a Secured Credit Card? - How Does a Secured Credit Card Work?

What Is a Secured Credit Card?

A secured credit card is just like a traditional credit card, with a few exceptions.

Banks, credit unions and other financial institutions will look at your credit rating before handing you a credit card. If you have a good credit rating, the bank knows that you are likely to pay your bills on time. Lenders may not be comfortable issuing you a traditional credit card if you have poor or zero credit, thinking you’re either new to the world of credit cards or have fallen behind on your payments in the past.

In that case, the lender may be willing to issue you a secured credit card, as long as you can meet the initial deposit requirement. You will then be free to use the card just like a traditional credit card. You will still have to make your monthly payments on time without going over your limit.

The lender uses your initial down payment as collateral in case you fall behind on your monthly payments. They will collect your down payment if you miss a payment, so the company doesn’t have to worry about tracking you down if you owe them money.

This reduces the risks associated with lending money to people with little to no credit while giving consumers a chance to build their credit if they have had money troubles in the past.

How Do Secured Credit Cards Work?

In most cases, the only difference between a secured credit card and a traditional one is the initial deposit. Both types of cards can be used to purchase any number of goods, however, secured credit cards usually come with a lower credit limit, so they are often used to purchase less expensive items.

The lender will manage the line of credit just as they would when issuing a traditional credit card. If you fall behind on your monthly payment, the lender may report the incident to a credit bureau which would then affect your credit score. There’s also a chance you will lose your initial down payment if you stop making payments.

Both secured and unsecured credit cards come with interest. In both cases, it’s best to make your monthly payments on time, so you can avoid taking on additional interest.  

Not all secured credit cards are created equal. Both secured and unsecured credit cards come with clear lending guidelines and requirements. When applying for a secured credit card, go over the instructions and lending policies to make sure the card in question meets your financial needs, so you can make your monthly payments on time.

When to Get a Secured Credit Card

There are many reasons to get a secured credit card, but it usually comes down to your credit score. This all-important number represents your rating as a consumer. If you have a poor credit rating, usually anything below 600, you will likely have trouble getting approved for an auto loan, mortgage or other financing. You may decide to sign up for a secured credit card as a way of improving your credit score before you begin the loan application process.

Having a low credit score will also affect your interest rates. You will have to pay more in interest when taking out a loan, which will make it harder to get out of debt. Signing up for a secured credit card will help you improve your credit rating, helping you lock in a lower interest rate if you decide to apply for another loan down the line.

A secured credit card is also a great choice if you’re new to the world of credit. High school students, young adults, and those new to the workforce may have no choice but to sign up for a secured card as a way of building their credit score. If you don’t have a credit rating, you can use a pre-paid credit card to prove to the bank or credit that you are a responsible consumer that pays their bills on time.

It’s important to note that some secured credit cards come with high interest rates with little spending power, so it’s best to avoid them unless you can’t get approved for a traditional credit card. It’s a great tool for building credit, but it’s usually meant for those with poor or no credit history.

Quick Tip

Maintain a good credit score by keeping your balance below 30% of the credit limit.

How to Get One

The first step is to evaluate your finances. You should have a clear goal in mind when applying for a secured credit card. Consider how you plan on using the card to get an idea of how much you may owe at the end of the month. Again, secured credit cards often come with a lower credit limit than traditional credit cards, so it’s best to use this card for smaller, everyday purchases.

Before you commit to a specific bank or credit union, shop around and compare different rates from various lending institutions. Some banks and credit unions may offer more flexible lending solutions, while others may be stricter. Read through the policies carefully to make sure the card meets your needs.

Some institutions interpret credit scores differently. You may be eligible for a traditional credit card if you apply to the right bank or credit union, so remember to keep your options open.

Once you find a card that works for you, you will need to fill out an application with the credit card issuer. The lender will also ask you for a cash deposit, which is usually around $200 to $300, but the deposit amount all depends on the card and lender.

As soon as you pay the initial deposit, you will be free to use the card however you see fit. Just make sure you pay your monthly bills on time and stay within your credit limit.

If you are using a secured credit card to build up a line of credit, making your payments on time will be crucial to your success. Set up automatic payments using the bank’s app or website, so you never have to worry about missing a payment. It will be automatically deducted from your bank account. You can also try to pay more than what you owe each month to further improve your credit score and reduce your interest fees.

Improving your credit score will help you unlock a new world of possibilities. You can apply for a car or home loan without paying as much in interest. It’s all about showing your bank or credit union that you are responsible with your money and pay your debts on time.