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- A secured credit card is a type of credit card with a line of credit backed by a security deposit.
- Because it doesn't require a credit history or credit score, secured credit cards are an appealing option for building a credit history.
- But secured credit cards charge higher annual interest rates and fees compared to traditional credit cards.
A secured credit card is a type of credit card that gives you a line of credit backed by a security deposit you pay when you sign up. Like most starter credit cards, it's accessible to people who have a low credit score. Most credit card companies won't perform credit checks for secured credit card applicants.
Your credit score broadcasts to companies how likely you are to repay a debt. A high credit score makes it easier to do a range of things, from applying for an apartment to getting a loan.
Having good credit is also important when applying for a credit card, which can help further build credit. This can seem counterintuitive, especially if you have a low credit score or no credit at all. If you're in this situation, a secured credit card might be one way for you to build your credit. Insider keeps track of the best secured credit cards currently available.
How secured credit cards work
Traditional credit cards use undisclosed mathematical algorithms that rope in credit score, income, and payment history to determine your credit limit. Alternatively, your credit limit on a secured credit card will be how much you deposited. Credit card companies hold this money as collateral if you default your credit card or rack up severe delinquencies.
Assuming you make your payments on time, the credit card company will return your security deposit when you pay off your remaining balance and close out the card. After a certain amount of time and credit built on the secured credit card, companies may also allow you to convert your secured credit card to a traditional card, at which point your security deposit will also be returned. However, an upgrade isn't guaranteed.
Secured vs. unsecured credit cards
Secured credit cards | Unsecured credit cards |
Secured credit cards often don't require a credit check and will take applicants with low credit scores | Credit card companies recommend a good to excellent (670-800+) credit score when applying for a card |
Credit limit determined by how much money is deposited | Credit limit determined internally based on a number of factors |
Often charges higher APRs | Offers APRs based on your application and credit scores |
How to get a credit card
Without the need for a credit check, the process for applying for a secured credit card is simple. Here are some steps to get you started.
Step 1: Determine your credit score
Before you decide you need a secured credit card, it may be helpful to know what your credit score is to see if there are other credit card options available to you at your current credit score. There are a number of services available that will help you get your credit score for free.
If you find that your credit is lower than expected, consult our list of the best credit cards for bad credit.
Step 2: Find which secured credit card is right for you
Most major credit card companies, including banks and credit unions, offer a secured credit card option. These cards can vary based on minimum and maximum deposit amounts, annual fees, and interest rates. Certain cards can also come with benefits including cash back or an introductory 0% purchase or balance transfer APR for a certain amount of time.
Step 3: Provide necessary information and security deposit
Since most of these secure credit cards don't require a credit check. Here's some other information they might ask for:
- Date of birth
- Address (can't be a PO box)
- Social Security number
- Employment status
- Occupation
- Annual income
- Monthly housing payments
On the application form, you'll also be asked how much you want to deposit as your collateral. Depending on the company, this can be anywhere from $200 to as high as $4,900. You will need a non-IRA bank account to make this deposit. Some banks also require you to have a bank account with that company.
Once you have your first secured credit card, it's important to make your payments on time each month. Though secured credit cards offer a way to build credit, they are subject to the same rules as normal credit cards. Missing payments or making late payments late can have an adverse effect on your credit score, which defeats the purpose of having a secured credit card.
Furthermore, with higher interest rates and fees on a secured credit card, you may end up paying more interest than normal credit card users. Additionally, some credit card companies reserve the right to take the due amount directly out of your bank account.
With little-to-no prior credit requirements, secured credit cards are one way to reestablish credit or start a credit history. However, with high interest rates and a self-determined credit limit, this card should be used with extra care.