How secured credit cards work

A secured credit card is a great way for someone to build or rebuild credit if they have a poor credit history or little to no credit history. 

The main difference between secured credit cards and unsecured credit cards is that a secured card is “secured” or backed by the deposit that you pay.

How secured credit cards work

Deposits for secured cards can be less than $100 or as high as the thousands. In most cases, the credit limit for your secured card will be 100% of your deposit. So, if you pay a $500 deposit, your credit limit will be $500. A partial deposit may be required. As an example, depending on your credit profile, Capital One may require a $49 deposit and provide you with a $300 credit limit. It’s important to note that you will usually not receive your deposit back until after the time that your card issuer specifies. This could be months, and sometimes a year or longer. Keep this in mind when deciding what your deposit will be.

In most cases, you will receive your deposit back either when you close the account or after a set period of time, as determined by your card issuer. This is usually the time that the issuer feels that you’ve demonstrated responsible credit use.

Sometimes, and this is the goal, your secured credit card will be converted to an unsecured credit card. You may even receive a credit limit increase.

Choosing a secured credit card

When shopping for a secured credit card issuer, it’s best to choose one that has no annual fee.

You’ll also want to choose an issuer that has clear guidelines on:

• When you’ll receive your deposit back
• When you’ll be able to convert from a secured credit card to an unsecured credit card 
• Possible credit limit increases

Since you won’t have access to your deposited funds, it’s important that your card issuer have specific guidelines that you can follow to receive your deposit back within a reasonable amount of time. As an example, Discover typically unsecures, or graduates secured credit cards after 8 months. Discover provides specific steps that you should take, and things to avoid, to graduate.

Some lenders do not provide promises to unsecure cards at all, which means that your deposited funds could be tied up indefinitely.

Because of the deposit requirement, some consumers opt for a secured card with a lower limit and hope to obtain a higher limit after the card is unsecured. As with secured credit cards, there’s not always a guarantee that you’ll ever receive a credit limit increase. But, if the size of your credit limit is important to you, it’s worth asking the card issuer if they have a policy of not providing credit limit increases. If they don’t and you were hoping to receive a higher limit at some point, it may best to consider another card issuer.

When searching for a secured credit card, or any card for that matter, it’s recommended that you select a card issuer with a proven track record. By reading reviews, specifically complaints, you can determine what common problems cardholders are having with the credit card issuer. You should avoid any card issuer that has many complaints about deceptive practices or billing issues.