If you're looking to build or rebuild credit, there are a number of credit cards on the market that are designed for that purpose. Secured cards are one of the best options for credit newbies or people with less than stellar credit.
You can use a secured card just like a traditional (aka unsecured) credit card to help you establish good credit, as long as you practice responsible credit behavior.
Below, CNBC Select outlines how secured credit cards work, the credit requirements to get one and how to transition to an unsecured card.
What we'll cover
- What is a secured credit card?
- How secured cards work
- Secured credit card vs. unsecured credit cards
- How secured cards can improve your credit
- Which secured card is right for you?
- How to transition from a secured to an unsecured card
- Bottom line
What is a secured credit card?
A secured card is a gateway for borrowers with low credit who are looking to build their score. Like an unsecured credit card, you receive a credit limit, can incur interest charges and may even earn rewards. The main difference is that with secured credit cards, you're required to make a security deposit of cash with the card's issuer, which typically determines your credit limit and acts as collateral if you fail to pay your bill.
Deposits usually range from $200 to $2,500. If you make a $200 security deposit, you'll receive a $200 credit limit. If you want a bigger credit limit, you'll need to deposit more money.
The amount you deposit is also completely refundable in one of two ways: Pay off your balance in full and then close your account or upgrade to an unsecured card.
How secured cards work
You use a secured card the same as you would an unsecured card, but they're typically easier to qualify for if your credit history is poor or non-existent.
The one big difference, in addition to the required security deposit, is the interest rate. Secured cards usually offer all users one variable interest rate, say 24.99%, for example. Meanwhile, an unsecured card often features a range, say 13.99% to 24.99%. In most cases, the better your credit score the lower APR you'll receive. Since secured cards often only have one, relatively high APR, it's extremely important you always pay on time and in full to avoid interest charges.
Secured credit card vs. unsecured credit cards
Your credit score will play the biggest role in whether you get an unsecured card vs. a secured card. That's because unsecured cards almost always earn better rewards and have a much higher credit limit than secured cards. Secured cards, on the other hand, benefit users with poor or non-existent credit looking to improve their scores via responsible use.
Here are some key differences between a secured credit card from an unsecured card:
- Deposit requirement - A secured card requires you to make a deposit, while an unsecured credit card does not.
- Credit score requirement - Most unsecured credit cards require a good to excellent credit score, which can range between 670 to 850. However, secured credit cards offer more flexibility, making it possible to qualify even with poor credit.
- Average APR - APRs can look a little higher for secured credit cards, compared to unsecured credit cards.
How secured cards can improve your credit
When you responsibly use a secured card, making payments on time and in full, this information will be sent to the three main credit bureaus, Experian, Equifax and TransUnion, which helps boost your credit score and puts you on the path to qualifying for an unsecured card.
Here are some ways you can build your credit with a secured credit card:
- Maintain a low credit card balance - You can utilize your credit card for everyday expenses but be sure to keep your credit utilization below 30%.
- Pay your balance on time and in full - Payment history is the most important factor of your credit score, making it key to always pay on time. If you consistently make on-time payments with your secured card, positive information will be reported to the credit bureaus, which helps you build credit.
Which secured card is right for you?
There are a few things to consider when choosing a secured credit card: how much is the required deposit, how do you transition to an unsecured card (more on that below) and can you earn rewards?
One strong secured card option is the Discover it® Secured Credit Card (see rates and fees), which requires a refundable security deposit, and your credit line will equal your deposit amount, starting at $200 but comes with some good perks. You can earn rewards (2% cash back at gas stations and restaurants on up to $1,000 in combined purchases each quarter, automatically. Plus earn unlimited 1% cash back on all other purchases), there's no foreign transaction fees and there's no annual fee.
Discover it® Secured Credit Card
On Discover's secure site
Rewards
Earn 2% cash back at Gas Stations and Restaurants on up to $1,000 in combined purchases each quarter, automatically. Plus earn unlimited 1% cash back on all other purchases.
Welcome bonus
Discover will match all the cash back you've earned at the end of your first year
Annual fee
$0
Intro APR
N/A on purchases
Regular APR
28.24% Variable
Balance transfer fee
3% intro balance transfer fee, up to 5% fee on future balance transfers (see terms)*
Foreign transaction fee
None
Credit needed
New / Rebuilding
*See rates and fees,terms apply.
Read our Discover it® Secured Credit Card review.
Capital One Platinum Secured Credit Card
Learn More
Rewards
None
Welcome bonus
No current offer
Annual fee
$0
Intro APR
N/A for purchases and balance transfers
Regular APR
30.74% variable
Balance transfer fee
$0at the Transfer APR, 4% of the amount of each transferred balance that posts to your account at a promotional APR that Capital One may offer to you
Foreign transaction fee
None
Credit needed
No credit history
See rates and fees. Terms apply.
Read our Capital One Platinum Secured Credit Card review.
If you're looking for a card that requires a smaller deposit, you might want to consider the Capital One Platinum Secured Credit Card (see rates and fees). You can qualify for deposits as low as $49, $99, or $200 to receive the minimum initial credit line of $200. You may deposit more than your minimum required security deposit before your account opens to receive a higher initial credit line, up to your maximum approved line of $1,000.
How to transition from a secured to an unsecured card
While a secured card is a great way to build credit, it's not an ideal long-term option since you have to deposit money to receive a credit limit. Eventually, you'll need an unsecured card that provides a bigger credit limit without a deposit.
The transition from a secured card to an unsecured card varies by credit card issuer. Some card issuers may perform periodic account reviews to evaluate whether you can be switched to an unsecured card. For the Discover it® Secured Credit Card, starting at seven months from account opening, Discover will automatically review your credit card account to see if they can transition you to an unsecured line of credit and return your deposit.
If your card issuer doesn't offer an automatic upgrade process, you can simply call the number on the back of your card and ask to be transitioned to an unsecured card. They may transition you to a similar card that doesn't require a security deposit. Be aware that a credit check may be performed.
Some card issuers may not offer a transition process, so that means you'll have to apply for an unsecured card and close your secured card account. Experts generally don't recommend closing credit cards, but secured cards are a bit different since you're required to put up collateral.
Before you close a secured card, make sure you apply for a new card and are approved. If you close your card before opening a new one, it may be more difficult to be approved.
FAQs
How do I get my deposit back from a secured credit card?
You can get your deposit back from a secured credit card by closing the account after building your credit or upgrading to an unsecured credit card.
Does getting a secured credit card hurt your credit?
Depending on the card, applying for a secured credit card could result in a hard inquiry, which will temporarily lower your credit score. But by maintaining a solid credit history and making on-time payments, you could gradually improve your score in the long run.
How much should I spend on a $200 credit limit?
The rule of thumb is to keep your credit utilization under 30%. That means if you have a $200 limit, you should aim to keep your total balance below $60.
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Bottom line
Secured credit cards offer an accessible pathway to building or repairing your credit. Though they come with a deposit requirement and a lower credit limit, this can safeguard you from taking on more debt and doing more damage to your credit. Consistently making small purchases with a secured credit card can significantly contribute to your credit history and potentially pave the way to transition to an unsecured credit card.
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For rates and fees of the Discover it® Secured Credit Card, click here.
Editorial Note: Opinions, analyses, reviews or recommendations expressed in this article are those of the Select editorial staff’s alone, and have not been reviewed, approved or otherwise endorsed by any third party.
I'm an expert in personal finance and credit management, having extensive knowledge and experience in the field. I've assisted numerous individuals in understanding and navigating the complexities of credit cards, particularly focusing on building and rebuilding credit. My expertise is backed by a deep understanding of credit reporting agencies, credit scoring models, and the intricate details of various credit card products.
Now, let's delve into the key concepts covered in the article:
1. What is a Secured Credit Card?
A secured credit card is a financial tool designed for individuals with low or poor credit scores who are seeking to improve their credit standing. It operates similarly to an unsecured credit card, allowing users to receive a credit limit, incur interest charges, and potentially earn rewards. The distinctive feature of secured credit cards is the requirement for a security deposit, which determines the credit limit and serves as collateral if the cardholder fails to make payments. Deposits typically range from $200 to $2,500 and are refundable upon paying off the balance or upgrading to an unsecured card.
2. How Secured Cards Work:
Secured cards function much like unsecured cards, but they are generally more accessible for individuals with poor or limited credit history. The significant difference lies in the interest rate, as secured cards often have a fixed, relatively high APR. Responsible credit behavior, such as timely payments and maintaining a low credit card balance, is crucial to avoid high-interest charges.
3. Secured Credit Card vs. Unsecured Credit Cards:
The choice between secured and unsecured cards depends largely on the individual's credit score. Unsecured cards typically require a good to excellent credit score, offering better rewards and higher credit limits. Secured cards, on the other hand, cater to users with poor or nonexistent credit, providing an opportunity to build credit through responsible use. Key differences include deposit requirements, credit score prerequisites, and average APRs.
4. How Secured Cards Can Improve Your Credit:
Using a secured card responsibly, including maintaining a low credit card balance and paying the full balance on time, contributes positively to your credit history. Information on your payment behavior is reported to major credit bureaus, such as Experian, Equifax, and TransUnion, helping boost your credit score over time.
5. Choosing the Right Secured Card:
When selecting a secured credit card, factors to consider include the required deposit, the process for transitioning to an unsecured card, and the possibility of earning rewards. The article mentions the Discover it® Secured Credit Card and the Capital One Platinum Secured Credit Card as notable options, each with its own features and benefits.
6. Transitioning from Secured to Unsecured Cards:
The transition from a secured to an unsecured card varies by issuer. Some issuers conduct periodic account reviews to determine eligibility for an upgrade. Alternatively, cardholders can proactively contact the issuer to inquire about transitioning. If no automatic upgrade is available, applying for an unsecured card while keeping the secured card open until approval is recommended.
7. Key Considerations and Bottom Line:
The article emphasizes that while secured cards are beneficial for building or repairing credit, they are not ideal for the long term. Closing a secured card account can be done by paying off the balance or transitioning to an unsecured card, which provides a higher credit limit without a deposit. Responsible use of secured cards is crucial for establishing a positive credit history.
In conclusion, secured credit cards serve as a valuable tool for individuals looking to establish or rebuild their credit. Understanding the nuances of these cards, selecting the right one, and transitioning to an unsecured card are key steps in the journey toward financial health.
