What is a Secured Credit Card and Do You Need One?

Have you had a tough time getting a credit card due to bad credit or no credit at all?

One way around the problem: Get a secured card, which removes a lot of risk for your credit card issuer. 

So, what's the difference between a secured and unsecured card, and should you get a secured card? We'll take a look at the differences between both and go over secured cards in detail.

What is a Secured Credit Card?

A secured credit card, or a credit card backed by collateral, means that you must put down a deposit to open the card. The credit card company keeps your deposit if you stop paying your bills. 

Collateral guarantees that the person who borrows money will pay it back. Banks and lenders use collateral in other ways — through mortgages and other secured debt. Borrowers offer something in return if you don't pay back your debt and lenders ensure that they will recoup their expenditures if you default.

Unsecured debt doesn’t involve any collateral. These debts prove riskier for lenders because they can't seize your assets if you stop making payments. Student loans offer one of the most common forms of unsecured debt. If you don’t pay back your student loans, your lender can’t seize your degree.

How Do You Get a Secured Credit Card?

You must fill out a credit card application and put down a deposit to get a secured card. Most secured credit cards require a deposit of $200 to $300. The more you deposit, the more flexibility you'll have in using your card. Let's say you put $300 on your card. You can make $300 worth of purchases with your secured card. 

Once you put the money on your card, it functions like a regular credit card. You must make at least the minimum payment each month and your card issuer will charge you interest on your card. If you don't make at least the minimum required payments, the credit card provider will keep your deposit. 

What is an Unsecured Credit Card?

You might wonder if an unsecured credit card looks different from a secured credit card beyond the deposit requirement. Unsecured cards don’t require you to put any money down.

Secured cards usually carry fees, such as an annual fee, an application fee and/or a processing fee to maintain your card. Secured cards also have higher interest rates than unsecured cards.

Your credit score may determine whether you qualify for a secure or unsecured card — you may not get a choice about one or the other. However, your credit card company may agree to allow you to go through a review period. At the end of the review period, you can upgrade to an unsecured card as long as you show you can make timely payments on your secured credit card. 

Pros of Using a Secured Credit Card

Thinking, "Aw, shucks!" when you find out you can only get a secured card? Good news: You might identify some major benefits to getting one!

Pro 1: A secured credit card offers a great way to build credit.

If you've started to drown in bad credit, a secured credit card offers one of the best ways to establish or improve your credit. Paying on time and managing your balance will help you improve your credit score because that information gets reported to the three main credit bureaus.

Pro 2: A secured credit card offers an actual way to get credit.

If you want a credit card but have had a few run-ins with bad credit, a secured credit card might be your only answer. Remember that it's okay to start with this option. Not everyone qualifies for excellent credit cards with low interest rates. You can always work up to an unsecured card later. As long as you make your payments on time, you might switch to an unsecured option, which takes less time than waiting for your credit score to go up.

Pro 3: You might get your deposit back.

As long as you don't default on your credit card, you might get your deposit back. For example, if you close your card and have maintained your payment history, you can get your deposit back. You don't have to kiss that money good-bye forever!

Ready to Build Credit with a Secured Credit Card?

As mentioned above, a secured credit card offers a great way to build your credit. Learn a few tips and tricks so you can up your credit score as quickly as possible.

Tip 1: Check your credit utilization.

You want to try to keep your credit card use in check with a secured card — or, with any credit card, for that matter. Figuring out your credit utilization sounds complicated, but you can calculate it using the ratio of your outstanding credit card balances compared to your credit card limits. In other words, let's say you hold a balance of $200 and your credit limit amounts to $1,000. Your credit utilization for that credit card amounts to 20%. You want to try to keep your credit utilization under or at 30%.

Tip 2: Go beyond making minimum payments.

One of the quickest ways to improve your credit score: Pay off your balance completely every month. Can't pay your credit card in full every month? Whatever you do, pay above the minimum — even if you pay just a little bit. Being as proactive as possible shows credit card issuers that you can borrow responsibly and only spend what you can afford to pay back. 

Secure Your Financial Future with the Right Card

A secured card can offer a great option to grow your credit score and also give you access to credit. Just apply for your card, put down your deposit amount and start using your credit card. 

However, you must make your minimum payments in order to see your score rise. Once you prove that you can reliably make your payments, you can switch to an unsecured card.