Getting a credit card
What Is a Secured Credit Card? contents
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A secured credit card is a type of credit card that requires a security deposit to open.
A secured credit card may be a good option for someone with bad credit or limited credit history.
The Discover it® Secured Card can help you build credit with responsible use.1
Finding the right credit card can be difficult if you have a low credit score or haven’t begun building your credit history. But that doesn’t necessarily mean you have to go without credit. One option is to apply for a secured credit card.
But what is a secured credit card? Understanding what makes a secured credit card different from an unsecured card and what it takes to qualify can help you make the best credit choices for your unique needs and circumstances.
A secured credit card is a card that requires the cardmember to secure the account with a deposit. Typically, the card’s credit limit equals the deposit amount. For example, if you’ve been approved for a secured credit card and put down a $1,000 security deposit, your credit limit for the account is $1,000.
Secured credit cards work by allowing you to make purchases within your credit limit, just like a normal credit card. And like a regular credit card, there’s a standard interest rate, or APR, on your purchases. But the deposit acts as collateral for the credit line.
Start by finding a secured credit card that aligns with your goals. If you want to build your credit history or improve your score, make sure the card issuer will report your activity on the secured card to at least one major credit bureau. That way, elements like your payment history will appear on your credit report and influence your score.
Once you find the right fit, it’s time to apply for the card. Because the security deposit offsets some risk, credit card companies generally have more relaxed requirements for secured cards than unsecured cards. But approval isn’t guaranteed. Credit card companies can deny your application based on your income or other aspects of your financial background.
If the card issuer approves your application, they typically offer you a maximum credit limit. You’ll need to pay a deposit to secure your credit card. The card’s credit limit usually equals that deposit amount. A card issuer may approve you for up to a $1,000 credit limit, for example. If you provide a $500 deposit, the credit limit on that card will equal $500, not the full $1,000. For a Discover it® Secured Credit Card, your credit line will equal your deposit amount, starting at $200.4
You can begin building credit history by using your card (as long as the credit card company reports your activity to a credit bureau). Late or missed payments on your credit card accounts and loans may hurt your credit score and lead to poor credit. But if you use your card responsibly by keeping your credit utilization low and paying your credit card bill on time each month, you may establish a positive credit history.
Secured and unsecured credit cards both give you access to a line of credit that you can use to shop and pay bills, but the card types work a little differently. The most obvious difference may be the security deposit—you don’t have to make a deposit to open a regular credit card. But there are some other differences to keep in mind.
Secured cards may come with higher costs to offset lenders’ risks. The Federal Trade Commission explains that secured cards often have higher interest rates than unsecured cards. While Discover has no annual fee on any of our credit cards, some credit card companies may also charge a higher annual fee for secured cards than unsecured cards. Before you apply for a secured card, take the potential higher costs into consideration.
The cards may also treat missed payments differently. For both types of cards, a missed payment can result in late fees or other penalties. However, if you totally miss a payment on a secured card, the credit card issuer may use your security deposit to pay what is due, and they may close your account. It’s vital to make all payments on your secured card on time whenever possible.
Finally, secured cards typically have lower credit limits than traditional cards. Since secured cards are designed for people who are building or rebuilding credit history, a smaller credit limit may make it harder to accrue substantial credit card debt.
Did you know?
Use the Discover Credit Card pre-approval form to see if you’re pre-approved with no harm to your credit score.5
Secured cards, prepaid cards, and debit cards all require account holders to provide funds before any purchases can be made, but that is essentially where the similarities end. A secured card is a credit card, not a debit or prepaid card.
Debit cards and prepaid cards don’t provide any credit. A debit card is connected to your savings or checking account, and you can make a cash deposit to a prepaid card or refill it through direct deposit.
With a prepaid card or debit card, the cost of each transaction is immediately subtracted from the balance of the account. But with a secured credit card, the money you put up–the refundable security deposit–is unaffected when you make a purchase. Your deposit doesn’t repay the account balance (unless you go into default or close your account with a balance). Rather, your charges appear on your monthly statement with an amount due for that month, the same as a regular credit card. Your monthly payments are separate from the money you put down initially.
Prepaid and debit cards don’t report to credit bureaus, but many secured credit cards do. If your secured card issuer reports to one of the credit bureaus, secured cards can be an attractive way to build credit history. Your responsible use can help you access more credit or better terms later down the line.
That’s why it’s critical to pay at least the monthly minimum on your secured credit card—it’s a pathway to positive credit history.
If you’re working to rebuild your credit history, a secured credit card can be an excellent tool. Thoughtful credit habits and strategies can help you make the most of your secured credit card today and reap the benefits of responsible use in the future.
When you get your first-ever credit card or open an account after going without available credit for a long time, it can be tempting to splurge. As a rule of thumb, though, you shouldn’t use credit to buy anything you couldn’t afford with your checking account. Once you’ve established a strong credit history, you may want to use your card to break down a big purchase—like a couch—into multiple payments across months. But it’s better to play it safe with a secured card and only make purchases you could easily pay back.
Your credit utilization ratio—the total sum of your outstanding balances compared to your available credit—has a strong influence on your credit score. Whenever possible, it’s best to pay your credit card balance in full. That way, you won’t carry credit card debt from month to month or owe pesky interest charges.
If you can’t afford to repay your balance in total, try to pay more than the minimum amount required. That way, you can gradually pay down your balance and minimize your interest charges.
Missing payments on your secured credit card could lead to losing your secured card account. So, it’s vital to stay on top of your credit card bill. If you need a reminder of your monthly due date, you may be able to set up payment alerts through your card issuer’s online banking tool. For a more hands-off approach, you can also set up automatic payments. Just make sure you always have enough in the linked checking account to cover the payments.
You might not have to forgo rewards while you work on building—or rebuilding—your credit history.
Some secured credit cards allow you to earn cash back. For example, the Discover it® Secured Credit Card helps you earn 2% cash back at gas stations and restaurants on up to $1,000 in combined purchases each quarter, automatically.6
You may be able to earn even more rewards with a Discover it Secured Card. We’ll automatically double all the cash back you’ve earned on your credit card at the end of your first year. There is no limit to how much we’ll double.7
With responsible credit habits, like repaying your balance in full each month, you can make the most of your rewards without worrying about interest charges.
After you’ve worked hard to foster strong credit habits and boost your credit score, you may want to make the switch to an unsecured card. Some card issuers periodically review your credit card account and may automatically convert your secured account to an unsecured account if you qualify. With Discover, after 7 months, we begin automatic monthly account reviews to see if you qualify to upgrade to an unsecured card and get your deposit back.3
But if you haven’t heard from your credit card company about graduating to an unsecured card, you may want to reach out and request an upgrade. If you’re eligible, they may send you a new card or convert your existing card.
If you have a poor credit score or limited credit history, a secured credit card may be an effective credit builder. Secured cards work similarly to a traditional credit card, but to open the account, you must put down a security deposit. Depending on the credit card company, you may be able to graduate to an unsecured credit card after showing consistent positive payment history and responsible use of your card. Just keep in mind that building or rebuilding credit takes time and won’t happen overnight.
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