What is a secured credit card and how does it work?

A secured credit card is a type of credit card that requires a refundable security deposit to open the account. The cardholder typically makes a one-time deposit that acts as collateral for the credit card issuer. It’s a bit like the deposit a landlord holds for an apartment.

A secured credit card can be a great option if you’re trying to build credit, especially if you’re having trouble qualifying for other cards.

What you’ll learn:

• To open a secured credit card account, a cardholder typically makes a one-time refundable security deposit.

• A secured credit card may be a good option for people looking to establish or build credit.

• The benefits of secured credit cards include access to a line of credit and the ability to work toward qualifying for an unsecured credit card.

A secured credit card is a line of credit opened with a one-time security deposit. Typically, this deposit is refundable and can be earned back by doing things like making on-time payments and paying more than the minimum. 

Because of the security deposit, a secured credit card can often be easier to get approved for than a traditional unsecured credit card. And that makes it a good option for people who are trying to build credit.

The biggest difference between secured credit cards and unsecured credit cards is the security deposit. Without the security deposit to act as collateral, unsecured cards tend to have stricter requirements for approval. 

Rewards like cash back or miles may be limited with secured cards. But not in all cases: The Capital One Quicksilver Secured card offers cardholders 1.5% cash back on every purchase.

Like secured credit cards, prepaid cards and debit cards require you to have funds deposited before you can use them. But prepaid cards are funded by loading money onto the card. And debit cards are usually connected to a checking account.

Plus, unlike secured credit cards, prepaid cards and debit cards may not help you build credit. That’s because activity on those accounts usually isn’t reported to the credit bureaus, according to the Consumer Financial Protection Bureau.

A secured card could help you:

• Gain experience using a credit card

• Access a line of credit

• Build your credit with responsible use, like paying your bills on time every month

• Work toward upgrading from a secured card to a traditional card

Here are some things to know about how a secured credit card works:

The security deposit acts as collateral for the line of credit and is usually refundable. It can be earned back with responsible use. Or if you decide to close your account, the card issuer may refund your deposit if your balance is paid in full.

In some cases, the security deposit may be the same as your secured credit card limit. For example, a $200 deposit might give you a $200 credit limit. But some cards might provide a credit limit that’s higher than the amount of the security deposit. With the Capital One Platinum Secured card, an initial security deposit of $49, $99 or $200 can open an account with a credit line of at least $200. Platinum Secured cardholders can raise their credit limits by depositing more than the minimum.

You can use a secured credit card to shop in person and online exactly as you would with an unsecured credit card. At the end of each billing cycle, your card issuer adds up all the transactions that occurred that period and adds any balance that wasn’t paid off from the previous billing cycle. And you’ll receive a credit card statement with a summary of the account activity, statement balance, minimum payment and due date.

You can use your secured credit card to build credit if both these things happen:

• You use your card responsibly. Responsible use means doing things like making on-time payments, keeping credit utilization low, understanding terms and monitoring your credit.

• The issuer reports to a credit bureau. Your card activity needs to be reported to at least one of the three major credit bureaus: Experian®, Equifax® or TransUnion®. Capital One reports secured card accounts to all three bureaus.

Here are some tips for using a secured card to build credit:

• Understand your deposit. Make sure you’re able to fully fund your deposit within the time frame required by the card issuer. If you don’t fund the deposit in time, there’s a chance the issuer may close your account.

• Track your expenses and statements. Your credit card may be declined if you exceed your credit limit. And if you’re paying interest, you could end up owing more than the deposit. 

• Make on-time payments. Paying at least the minimum payment by the due date every month can help you avoid late fees and other penalties. And if you’re able to pay your statement balance in full, you may be able to avoid interest charges altogether.

• Use a budget. If you only use the card for a few fixed purchases each month, it may be easier to limit your spending and stay within your credit limit. Taking this approach could also help you get familiar with using a credit card. 

• Track your progress. One easy way to monitor your credit score and credit report is by using CreditWise from Capital One. It’s free for everyone to use. And checking your credit score won’t hurt it. You can also get free copies of your credit reports from each of the three credit bureaus by visiting AnnualCreditReport.com.

The process of applying for a secured credit card varies by issuer. But here’s how it might work:

1. Get approved for a secured card. To start, you could check whether you’re pre-approved for a secured card before you apply. At Capital One, pre-approval is quick and designed with security in mind, and it won’t hurt your credit scores.

2. Make your security deposit. Some card issuers allow you to fund your deposit over a period of time. Others may require an up-front deposit. 

3. Start using your secured card. Once you’ve received your card, you can use it to make purchases like you would with any other credit card. If your goal is to build credit, it’s important to use your credit card responsibly. That means doing things like making monthly payments on time.

A secured credit card is a type of credit card that’s opened with a one-time, refundable deposit. These cards can be helpful tools for people looking to build credit. With responsible use, a secured card could be part of building credit and working toward financial goals. 

Are you new to credit or searching for your next credit card? Capital One can help:

• Check for pre-approval offers with no risk to your credit scores.

• Earn unlimited 1.5% cash back on every purchase, every day, with Quicksilver or other cash back rewards cards.

• Explore credit cards you can use to build credit responsibly and earn rewards.

• Monitor your credit score with CreditWise. Checking won’t hurt your credit score, and it’s free for everyone.