What Is a Secured Credit Card?
If you need to build your credit and want the convenience of charging your purchases to a card, a secured credit card might be a good option for you. Learn how secured credit cards work and how they differ from traditional credit cards.
A secured credit card looks and acts much like a regular credit card. The biggest difference is that a secured card can help you start building your credit from scratch — whether you have no credit history or your credit needs repair.
A secured credit card might be a good option for college students, young adults, newcomers to the U.S. and people trying to recover from a financial setback.
"Think of it like a credit card with a safety harness, supporting you as you work your way up to a traditional unsecured credit card," said Jeffrey Kim, Director of BECU's Credit Card Product Strategy.
Here's how secured credit cards work.
Regular vs. Secured Credit Cards
Secured credit cards can be used like a traditional credit card, whether shopping online, renting a car or buying groceries at the store. Many financial institutions, like BECU, offer secured credit cards with the same design as a traditional credit card, so merchants can't tell whether you're using a secured or unsecured credit card. The cards' designs are the same.
|Secured Credit Card
|Traditional Credit Card
|Refundable Security Deposit
|Credit History and Credit Score
Little or no credit history or low credit score
Strong credit history and average to excellent credit score
|Can Be Used Online and In Person
|Sign-Up Bonus or Other Introductory Offers
|Minimum Monthly Payment Required
Regular Credit Card vs. Secured Credit Card
If you're approved for a traditional credit card, you probably have an established history of credit use and an average to excellent credit score. If you're not approved, it could be because you have a "thin" credit file, which means you don't have a credit score or any credit history. Or it could be due to a history of unpaid debts or missed payments. As a result, you may be offered a secured credit card instead.
Security Deposit and Your Credit Line
A regular credit card is also known as an unsecured card. You don't need to put cash into an account to "secure" your credit. An unsecured card will provide you with a specific credit line — the amount you can spend based on your credit history. Traditional unsecured credit cards may offer you a higher credit limit if you request a new limit — for example, your limit of $5,000 may be increased to $10,000.
With a secured credit card, a financial institution may offer you a credit line but require you to make a security deposit to fund the credit line amount. Your cash deposit acts as collateral. At BECU, the deposit is put into an interest-bearing account with competitive rates.
Typically, a secured card has a lower credit limit than you can get with an unsecured card and a good credit history. However, your financial institution will regularly review your credit usage and history of making on-time payments.
Different financial institutions set different minimum and maximum deposit amounts that range from a couple hundred dollars to several thousand dollars. BECU's secured credit card, for example, has a $250 minimum and $10,000 maximum.
Paying Your Bills
The payment rules for both regular and secured credit cards are similar. If you accumulate a balance, you must pay at least the minimum payment by the due date. Otherwise, you may pay late fees and your credit score may drop.
If you don't pay your secured credit card balance, the bank can use your security deposit to pay off your card balance. This can damage your credit.
Bonuses and Benefits
Many traditional unsecured cards offer sign-up bonuses for spending a limited amount within a specified time or an introductory interest rate. These are generally not available with a secured card.
Secured credit cards often come with incentives to use the card, including cash back, points, or insurance coverage for products you buy. A secured credit card may also offer benefits like travel insurance and adding your card to your digital wallet. You'll also likely benefit from enhanced security features and fraud protection.
Graduating to a Traditional Credit Card
The next step for secured cardholders is to "graduate" to a traditional card. After your credit improves, the card issuer may return your security deposit, raise your credit limit or tell you when you qualify for traditional unsecured cards.
You can also have your deposit refunded if you close the account in good standing. However, closing new credit accounts could damage your credit score — even if rarely used — by reducing the length of your credit history.
How Does a Secured Card Work?
Secured credit cards can help you build credit and offer an easy way to pay for services and merchandise in shops, while traveling and online. Here's how a secured card works for different populations.
Students and Young Adults
When embarking on your independent financial life as a young adult, you likely won't have any credit history. As a result, the credit bureaus don't have enough information to create a credit score. Without a credit score, you may find it difficult to rent an apartment or get an auto loan when you're ready to buy a car.
A secured credit card is an excellent way to jump-start your credit history while practicing charging, checking your balance and paying off your debt. You could qualify for a traditional credit card in time and get your credit off to a great start.
Immigrants and Newcomers to the U.S.
If you moved to the U.S. from another country, your credit history doesn't come with you. A secured credit card can help you build a U.S.-based credit history. You may be required to provide a Social Security Number or individual taxpayer identification number (ITIN) to qualify for a secured credit card.
People with Bad Credit
If you no longer qualify for a regular credit card and want to repair your credit history, a secured credit card can help you rebuild your credit. Choose a card that reports to the credit bureaus, doesn't charge many or any fees, and you can upgrade to a regular card in time.
Choose the Best Secured Credit Card for You
Many financial institutions act as secured credit card issuers. When comparing your options, think about the following.
Secured Credit Card Rates
In general, secured credit cards tend to charge more interest as an annual percentage rate, or APR, than traditional credit cards, but you may be able to find a lower APR at a credit union than at a bank, according to MyCreditUnion.gov.
Most financial institutions will graduate you to traditional unsecured credit cards after you show a pattern of consistent repayment. Ask if your APR might be reduced as well, particularly if you're paying a higher APR.
Your Secured Funds
Make sure your security deposit is held in an interest-bearing savings account with the bank or credit union providing you with the secured credit card. Compare interest rates to earn the most while your financial institution holds your money.
Secured Credit Card Fees
Compare fees for secured credit cards. Fees might include annual fees for having the card, foreign transaction fees or cash-advance fees for taking money out of an ATM. Look for a card with few to no fees or fees that are easier to avoid in your situation.
Secured Credit Card Cash Back and Points
Some cards offer points or cash back for all spending or spending in specific categories such as travel. Remember, the best way to take advantage of cash-back deals or points is to pay off your entire balance monthly to avoid interest charges.
For example, the BECU Secured Cash Back Credit Card offers 1.5% back on purchases. If you spend $100, you'll get $1.50 back. You can put this amount toward your balance.
Secured Credit Card Perks
Like a traditional credit card, a secured credit card could offer extended warranties, travel coverage and other benefits when you make purchases. These can be helpful as you rebuild credit or improve a low credit score. Just remember that not all secured cards offer perks for your credit journey.
Is a Secured Credit Card Right for You?
A secured credit card is a good fit for you if you want:
- To build credit history through monthly payments.
- The ease and convenience of a plastic credit card.
- Perks, such as cash back or another rewards program.
- To work toward getting a traditional credit card from the same financial institution.
You'll also need to have enough money on hand for the refundable deposit. "Deposit however much you feel you're able to, without easy, immediate access to the money while it's on hold," Kim said.
When To Switch to an Unsecured Credit Card
If your credit union or bank offers a secured version of your credit card, it will review your account for your credit-building habits, typically after 6-12 months. The financial institution could decide to graduate you to a traditional, unsecured card.
Institutions may have different requirements to approve you for an unsecured credit card, but these could include:
- Positive payment history for the secured card.
- Credit score improvement.
- Sufficient income.
- No other unpaid debt.
If you're approved for an unsecured credit card upgrade, the bank or credit union could raise your credit limit and return your security deposit.
At some financial institutions, like BECU, you can continue using the same card and card number after you're approved. It officially transitions to an unsecured credit card. Other financial institutions may approach the transition differently.
Approval subject to BECU membership, credit approval and other underwriting criteria; not every applicant will qualify. Credit Card programs, services, rates, terms and conditions are subject to change without notice. Contact BECU for the most current information.