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Secured Credit Card Definition

What is a secured credit card?

A secured credit card works pretty much like a regular credit card except that you have to put down a deposit with the issuer. This deposit acts as a collateral and is also your credit limit. Secured credit cards are mainly used to build or rebuild credit and since people who apply for these cards either have no credit or bad credit, issuers prefer if they put down a deposit.

How do secured credit cards work?

Like we mentioned above, a secured credit card works just like a regular secured credit card. You can apply online for most cards. Some issuers require that you visit the branch (this applies a lot to secured cards from credit unions) and you may actually increase you chances of approval if you have a checking account.

Like all credit card application process, banks will check a variety of factors (including your credit score, mortgage, rent, income etc) and decide whether to approve or not to approve your application. There are a couple of cards like Opensky that do not perform any credit checks and is great for folks that have had a few hard pulls on their credit report. You could also be denied of a secured credit card if your credit is really bad.

Unlike regular credit cards, you have to put up a security deposit with a secured credit card. During your application process, you will be asked to indicate what amount you want to put up. The minimum ranges from $200 to $500. The maximum tends to range from $1,000 to $5,000. You will be asked to fill in your bank account number and routing number. Some issuers will take your deposit before they approve you and will refund you the deposit if you are not approved. For example, it is not uncommon for those who apply for the US Bank secured credit card to see that US Bank has taken their deposit from their bank account but only approve them 2 weeks later.

There are a few nuances to be aware of with regards to the deposit. Some earn interest while others do not pay any interest at all. Given that interest rates are so low at the moment, this should not be a make or break issue. Different issuers also have different policies on when you can add additional deposits. Some allow to add additional deposits whenever you want. Others require $100 increments. Some only allow you to add a deposit after six months.

Once you get approved, you simply use it like a regular credit card. You charge some spending to your card and you either pay off the minimum or pay in full every month. If you get a secured credit card from a mainstream issuer, you could use download and use their app and manage your credit card from there. You can also set up autopay and check your balances.

Depending on whether you get a Visa, Mastercard or American Express, you should get standard benefits like car rental collision damage waiver insurance etc that comes with regular credit cards.

Do secured credit cards help build credit?

One very common question people ask is does secured credit cards help build credit? And the answer is a definite YES. Secured credit cards do help you build credit. The do report your payments to the three major credit bureaus. They report your deposit and credit limit and the balance that you carry as well as your timely (or late) payments. If you use your secured credit card wisely and follow best practices, then it should help you improve your credit score. Depending on your credit situation, secured credit cards alone can help you improve your credit score pretty quickly.

Do secured credit cards report as secured or unsecured?

Actually both. Some report as secured while others report as unsecured. But the reality is that how they report has absolutely no impact on your credit score or how fast it will improve. All credit bureaus care about is what is your credit limit, how much of it are you using (credit utilization ratio) and do you pay on time. Do not fuzz too much about whether the secured card you got report as secured or unsecured.

Do secured cards graduate to unsecured credit cards?

Some do and some do not. Examples of issuers that graduate secured card holders to unsecured include Discover and US Bank. Though they allow you a path to graduation, there is no guarantee that you will graduate. You have to show you can use your card responsibly and if your credit score improves, you could graduate without having to apply for another unsecured credit card. Whether the card graduates or not should have no bearing on whether you decide to get the card. Once your credit scores improve, you could apply to get regular unsecured credit cards with no annual fee. If you get approved for a couple and you are happy with your credit limits, then you can simply close your secured credit card.

Do I get my deposit back when I close my secured credit card?

When you decide to close your secured credit card, you will get your deposit back as long as you owe nothing to the credit card issuer. Different issuers have different policy as to how long you will get your deposit back. Some state in their terms and conditions that it might take as long as 30 days. For the most parts, you should get your deposit back in your bank account in a few days after you close your secured credit card.

Secured credit cards are the best tool for rebuilding credit as it has the lowest cost among rebuilder cards, especially unsecured credit cards for bad credit.

What's Next?

Pros and Cons of Secured credit cards

How does deposits on secured credit cards work?

What should a typical deposit be on a secured credit card?

How to use secured credit cards wisely?

How fast can secured credit cards build credit?

How many secured credit cards do you need to build credit?