How Do Secured Credit Cards Work?

Learn how secured credit cards work and how they can help you build your credit with responsible use

For someone who doesn’t have the credit they want or need, a secured credit card can be a great first step toward building good credit. As you build credit through responsible use, you make yourself more attractive when you apply for things like mortgages, car loans or other credit cards.

But before you apply for a secured credit card, you’ll want to learn how secured cards work, what it takes to get one and how they’re different from traditional cards.

Q: What Is a Secured Credit Card?

A: A secured credit card can be a great option for people who are establishing, building or rebuilding their credit. It’s “secured” because it requires money to be put down in order to open an account. That money is known as a security deposit. 

Once you’ve been approved for a secured credit card and made your deposit, you can use the card to make purchases in stores or online—just like a traditional, unsecured credit card. By using your secured card responsibly and making your payments on time each month, you can start to build (or rebuild) your credit.

Q: How Does the Security Deposit Work, and Will I Get It Back?

A: Your secured card’s security deposit is money you pay to the card issuer to open your account. The deposit is held as collateral, similar to the security deposit you give a landlord when you rent an apartment. 

How much you must provide for a security deposit varies. A security deposit may be the same amount as your line of credit (for example, a $200 deposit may give you a $200 credit limit).

The deposit is usually refundable. For example, Capital One will refund your deposit if you close your account and pay your balance in full. In some cases, it could be returned even earlier if you spend responsibly and pay your monthly statements on time.

Q: Who Should Get a Secured Card?

A: If you’re looking to build (or rebuild) your credit, a secured card can help you create a successful track record if used responsibly. A secured card is like on-the-job training you can use to move on to bigger and better opportunities. 

If you’ve never had a credit card before, have a damaged credit history or want to improve your credit score, a secured card might be the way to go. Secured cards are also one option for college students who are new to credit

Q: Are There Certain Requirements for a Secured Card?

A: As with any credit card, getting approved for a secured card isn’t guaranteed. Aside from a security deposit, there may be additional approval requirements. Each credit card company has its own policies. You can see whether you’re prequalified for a Capital One card. It’s quick and secure—and it won’t affect your credit.

Q: How Can Secured Cards Help You Build Credit?

A: Capital One and some other companies that issue secured credit cards will report your status to the major credit bureaus on a regular basis. If you’re paying at least the minimum payment on time each month and using your card responsibly, that reporting can help you build and improve your credit. Keep in mind that late or missed payments could harm your credit.

Another fact to consider: Not all issuers report the status of secured cards. If better credit is your goal, look for a secured card that reports to at least one of the three major credit bureaus.

Q: How Is a Secured Card Different From a Traditional Credit Card?

A: Secured cards and traditional (unsecured) credit cards work similarly. The biggest difference is that a security deposit is required to open an account for a secured card. 

Credit limits may differ, too. With traditional cards, the credit card company gives you a credit limit based on your credit history. With a secured card, your credit limit may be based on the security deposit. Some secured cards offer opportunities to increase your credit limit.

Rewards like cash back, miles or points may also be limited with secured cards.

Q: Do Secured Cards Look the Same as Traditional Credit Cards?

A: Generally, yes. It depends on the credit card company, but most secured cards look just like traditional cards, so chances are good that no one but you will know you’re using a secured card.

Q: When Is the Right Time to Transition to a Traditional Credit Card?

A: There’s no right time to move from a secured card to an unsecured card. When and why you decide to apply for a traditional credit card will depend on your situation and goals. Some credit card companies may allow you to move seamlessly from a secured card to a traditional card without closing your original line of credit. The process may even involve returning your deposit.

Check with your credit card company to understand what’s possible and how your account will be treated if you transition to a traditional card. And be sure to understand how closing your secured card account could affect your credit. Keeping multiple accounts open may be a better option.

Q: What’s the Difference Between Secured Cards and Debit and Prepaid Cards?

A: One big difference is that debit and prepaid cards can’t help you build credit the way a secured credit card can. That’s because activity on those accounts isn’t usually reported to credit bureaus. Prepaid cards may also lack many of the security features of a credit or debit card.

Another primary difference between secured cards and debit and prepaid cards is where the funds used to pay for things come from. Prepaid cards are usually loaded with money ahead of time, and a debit card is usually linked to a checking account. But a secured card functions differently: The credit card company provides funding that you then pay back each month. Be aware that it’s unlikely you’ll be able to use your security deposit to pay your monthly bill.

Q: What Are Some Tips for Using a Secured Card?

A: When it comes to secured cards, best practices are much the same as those for building credit with a traditional card. Here are a few secured credit card tips to help set you up for success: 

  1. 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 lender may close your account.
  2. Keep an eye on your spending. 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 your initial deposit.
  3. If you use the card only for a few fixed purchases a month, it may be easier to avoid going over your limit.
  4. Consider your monthly payment. If you pay your statement balance in full every month, you may be able to avoid interest and other fees.

If you want to start working toward better credit, a secured card is a great place to start. Remember, building good credit takes time. Do it at your own pace, and consider choosing a card like the Secured MasterCard® from Capital One to help you take steps toward an even brighter financial future.

We hope you found this helpful. Our content is not intended to provide legal, investment or financial advice or to indicate that a particular Capital One product or service is available or right for you. For specific advice about your unique circumstances, consider talking with a qualified professional.

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