Question 1

How does a secured credit card work?

Accepted Answer

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. 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.

Question 2

Does a secured card work differently from a prepaid card or debit card?

Accepted Answer

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 traditional 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.

What Is a Secured Credit Card?

Key Takeaways

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