If you have poor credit, or none at all, it can be tough to get a loan or line of credit — even though that may be exactly what you need to up your credit score. Building a record of on-time payments is an important factor that impacts your creditworthiness.

The good news: A secured credit card, which requires a refundable security deposit in exchange for a line of credit, could be the solution. Lenders may be more willing to issue secured credit cards to less qualified borrowers because the deposit will be used to cover the balance if it goes unpaid.

  1. How a Secured Credit Card Works
  2. How Are Secured Credit Cards Different From Prepaid Cards and Debit Cards?
  3. Graduating From a Secured Credit Card

1. How a Secured Credit Card Works

Like any other credit card, you first have to apply and get approved. Secured credit card applications are similar to other credit card applications in that they require your basic financial information, as well as your permission to perform a credit check. But they differ in that a secured credit card application will also require your bank account and routing number in order to submit a refundable security deposit.

Once you’ve been approved and put down your deposit, a secured credit card functions much like its unsecured counterpart: You will receive a statement each month, and you should try to pay your balance in full each month by the due date to avoid interest charges on new purchases.

You will enjoy the convenience and security of a credit card, as well as any benefits or rewards that the card may offer. For example, it can be much easier to reserve a hotel room or rent a car when you have and can use a credit card.

2. How Are Secured Credit Cards Different From Prepaid Cards and Debit Cards?

Secured credit 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. With prepaid and debit cards, the amount of each purchase 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 and is not used to pay the account balance (unless you go into default or close your account with a balance). Rather, your charges will appear on your monthly statement with an amount due for that month. Your on-time monthly payments are separate from the money you put down initially.

Whereas most prepaid and debit cards generally do not report to credit bureaus, most secured credit cards do. This is why they are an attractive way to build credit — your responsible use counts for something.

And that’s why it’s critical that secured credit card users make on time payments each month on all their loans in order to build a strong credit history.

Discover it® Secured Credit Card


Build or Rebuild Your Credit with Discover it® Secured Card.

3. Graduating From a Secured Credit Card

The goal of many secured credit card users is to improve their credit score to the point where they qualify for a regular, unsecured credit card and they can get their security deposit back. This process is often called graduating to an unsecured credit card, and typically requires that the card user achieve a credit score of approximately 670 and above, don’t spend beyond the deposit limit, manage other financial accounts responsibly and make credit card payments on time.

Alternatively, secured credit card users can always pay off their remaining balance and close their account at will.

Secured credit cards can be a great way to build or rebuild credit and establish good financial habits for the future.

Published June 20, 2016

Updated January 7, 2021

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