What is a Secured Credit Card?

We’re often told to do our best, rather than to try to achieve perfection. The same goes for credit. The odds of having a perfect credit score are extremely low: according to Experian, less than 1% of the U.S. population has a perfect FICO score of 850.  

Even if you don’t have a perfect credit score, keeping your credit as healthy as you can means enjoying the most financial freedom and opportunities possible. 

But for more and more Americans, achieving even a decent credit score is becoming a lofty goal. With 16% of American adults (about 52 million) at a FICO score below 579, the number of people whose credit is considered less than stellar is substantial.  Perhaps even more shocking is that as of 2010, 26 million American adults are considered to be either “credit invisible” or “unscorable” because they don’t have enough credit history to even be on the credit score radar. 

Given the stats above, there’s a fair chance that your credit is either subprime or non-existent. If that’s the case, you’ve likely seen how difficult it can be to get a standard credit card.  You’re probably thinking: “But how am I supposed to build good credit if I can’t get a credit card in the first place?”  Don’t worry—you have options. One that works for many comes in the form of a secured credit card.  

What are secured credit cards, and why should I care? 

Secured credit cards are very similar to standard credit cards, with one major difference: Secured credit cards require a cash deposit, whereas standard credit cards do not.  

Ever wonder why the interest rates on credit cards are so high? It’s because they don’t require collateral. Unlike a mortgage, which is backed by your house, when a bank issues you credit, they must rely solely on your perceived ability to repay them. In this case, your “reputation,” or creditworthiness, is your credit score. So, if you haven't built up a good credit score (or don’t have one to speak of), banks may be hesitant to issue you credit. That’s why secured credit cards require a cash deposit: the bank holds your deposit as collateral while they issue you credit.  

This cash deposit is completely refundable (if you pay the card off). The size of the deposit—and the line of credit extended to you—will vary depending on your credit score (or lack thereof), as well as which credit card and bank you decide to go with. Aside from these factors, a secured credit card is almost the same as a standard credit card. It might have a lower limit or different annual percentage rate (APR), but it still functions the same way: the bank extends you a line of credit that you have to pay off every month or you get hit with interest charges.  

Who can get a secured credit card? 

The short answer: just about everyone. Even if you have bad credit (or no credit), you’ll likely qualify for a secured credit card from a major bank. In most cases, you’ll be subject to a credit check prior to approval. This credit check will typically take the form of a hard inquiry. Hard credit inquiries involve the lender soliciting your credit report from one of the big three credit bureaus (Experian, TransUnion, or Equifax). Note that hard inquiries may have a small negative impact on your credit score. It’s important to keep in mind that even though secured credit cards are intended for people with bad or no credit, you still have to qualify for them. A hard inquiry is used to determine whether you qualify for the credit card—and, if you do, how much credit you qualify for.  

What are my options with secured credit cards? 

Not all secured credit cards are created equal. Depending on your needs, they can vary dramatically in terms of availability, deposits, APRs, annual fees, credit limits, and benefits.  Here are a few things to consider when shopping around for a secured credit card. 

• Availability: As mentioned above, you may not qualify for every secured credit card out there. You can find more information about each creditor’s “recommended credit score” on their website. Some banks will make exceptions, but these numbers are generally a good barometer for determining whether you’ll qualify.  

• Deposits: Initial deposits for secured credit cards generally start around $200. However, depending on your credit score and your desired credit limit, an initial deposit can be as high as four figures.  

• Rates: APRs can fluctuate dramatically from card to card, ranging from as low as 9.99% to 22.99% and higher.  

• Annual fees: In addition to the refundable deposit, some cards require an annual fee. While not all cards have annual fees, those that do can charge as much as $50 per year.  

• Credit limits: It’s important to find out what your line of credit will be, as this can vary dramatically from card to card. However, with timely payments, some secured credit cards will let you increase that limit over time.  

• Benefits: Just like standard credit cards, secured credit cards can offer all sorts of benefits, like cash back at restaurants and gas stations.  

Make sure to take time to speak with your bank, do your research, and read all the fine print when weighing your options to find the card that’s right for you.  

Will a secured credit card help me earn a better credit score? 

Secured credit cards may be one of the best ways to earn a better credit score for those who have bad or no credit.  Of course, you’ll need to keep up with your payments, making sure you pay off the balance every month in full.  It typically takes about 30–45 days to start building credit once you have a secured credit card. That gives you time to go through one monthly cycle and pay it off. But it could take years to build “good” credit. It’s generally recommended that you keep your secured credit card for at least a year to build up the proper credit needed for an unsecured (standard) credit card. For some people, it may be faster. For others, it can take longer. 

The difference a good credit score can make  

Your credit score can have a profound effect on your life. After all, negative changes in your credit score can mean higher rates, costing you more money over your lifetime. Positive changes to your credit score, on the other hand, can open you up to new possibilities. You can save more money and get better benefits with better credit cards. But it all starts with building credit. And one of the best ways to do that is with a secured credit card.