Secured Credit Cards Guide: Definition and How They Work

Secured Credit Cards Guide: Definition and How They Work
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Point Editorial

A secured credit card is one of many credit card types, and while each type of credit card has its advantages, a secured card is one of the best ways to start building your credit or improving your credit

Read on to learn about what a secured credit card is, how it differs from an unsecured card, how it influences your credit, and how you can go about obtaining one of your own. 

What is a secured credit card? 

To obtain a secured card, you must first pay an up-front deposit. The amount you pay will serve as your credit limit. For example, if you pay a $400 deposit, you can spend up to $400. If you cannot pay your bills, the credit issuer will take the money from your deposit. This is a method of risk management. 

If your credit score improves and you demonstrate good behavior by making timely payments, some issuers may let you upgrade to an unsecured card. If this happens, you will receive your deposit back. 

Deposit amounts vary, but $200 is typically the minimum deposit requirement.

Secured credit cards are not the same as prepaid credit cards. With secured credit cards, you’re still borrowing money from the credit company. With prepaid credit cards, you are loading your own money onto the card. No borrowing occurs. Unlike secured credit cards, prepaid cards do not influence your credit history. 

How do secured credit cards work?

Secured cards function identically to traditional credit cards. As soon as you pay the security deposit, you're set to start spending. 

Cardholders can make both in-store and online purchases with this type of card.

Each time you pay your monthly bill, whether you choose to pay the minimum or the entire balance, you are actively working to improve your credit score. That said, if you miss the due date or make late payments, your interest rates may rise, you'll face additional penalties, and your credit score will suffer, too.

And if applicable, make sure to account for the card's annual fee as well.

Secured credit cards versus unsecured credit cards

Secured cards

Again, this is a great option for those who have no credit or bad credit. An upfront refundable deposit is mandatory to activate the card. 

If you pay your bills in a timely fashion, the card issuer may raise your credit limit or upgrade you to an unsecured card.

Unsecured cards

In comparison, you do not need to pay a deposit to obtain an unsecured card. Ultimately, this raises the risk for the credit company. Usually, individuals who have high credit receive these cards. They do, however, come with steeper interest rates. They can also offer rewards programs such as cash-back or travel points.

Credit card companies like Visa and Mastercard offer both secured and unsecured cards.  

Point Card

Alongside a secured and unsecured card, Point Card is a third option that's designed as a transparent, easy-to-use alternative payment card. 

Point Card allows cardmembers to have monetary independence while enjoying the same benefits offered to traditional credit card users. Point members are free to spend their own money while receiving exclusive benefits at the same time, including unlimited cash-back and bonus cash-back on subscriptions, food delivery, rideshare services, and coffee shop purchases.

In addition, Point membership includes multiple financial safety nets such as fraud protection with zero liability, rental car and phone insurance, and no interest rates. So, you'll have peace of mind knowing that not only is Point working hard to help build your wealth, but it’s working just as hard to protect it. 

No upfront deposit is necessary, and you'll be able to build your credit history, too. So, whether you're at the beginning of your financial journey or a seasoned pro, Point is an excellent tool for intelligently navigating your finances.

Regardless of the type of credit card you select, taking personal responsibility for how you use it is important.

How to use a secured card responsibly

Tip 1: Make sure you have funds available not only to make a deposit but to pay off your minimum charges each month.

Tip 2: Stick to smaller purchases. Secured cards typically have a much lower credit limit than traditional credit cards, so the potential of maxing out your card is higher. Also, you want to be sure you have enough money to pay your bills first.

With traditional credit cards, experts recommend keeping your credit utilization to less than 30 percent. Since the credit limit is significantly lower for secured cards, keeping your utilization at 10 percent or less is recommended.

Tip 3: Be mindful of costs. Secured cards often have higher interest rates and late fees because card users are considered "risky ventures" for credit lenders. The card's APR, or annual percentage rate, which is the cost of using the card every year, can also be higher. Application and processing fees can apply as well. So, it is wise to know about each of these factors before applying for any card. 

Do secured credit cards build credit? 

Yes, they do. Again, these cards are specifically designed to help people build credit, especially those who have poor credit.

Each time you make a credit card payment, the three major credit bureaus — Experian, Equifax, and TransUnion — make a note in your credit file. This establishes your history and determines your credit score over time. Your creditworthiness will grow, and you'll have access to more cards — particularly ones that offer perks and rewards programs. 

How to get a secured credit card 

Before you decide to apply, always do your research. What are the rates and fees associated with a secured card? Which credit card companies issue secured cards? Also, make sure that whatever card issuer you select reports to the credit bureaus. Otherwise, you won’t be able to build or improve your credit. 

Outlined below are general steps associated with the actual application process.

Step 1: Find a secured credit card issuer. In addition to Visa, Mastercard, and American Express, some banks will issue cards directly, including Wells Fargo, Bank of America, and Capital One.  

Step 2: Compare secured cards. Again, do your research so you can find the card that best fits you and your needs.

Step 3: Make sure your credit history is recorded and sent to the credit bureaus. 

Step 4: Fill out the application. You can do this at your local banking institution. You will need to provide your address, Social Security number, and employment information, among other things. 

Step 5: Make a deposit. Once approved, pay the deposit. Remember, this will serve as your credit limit and collateral if you cannot pay your balance. 

Step 6: Start using your card.

Step 7: Make your minimum monthly payments.

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Point Editorial
A group of writers, thinkers, & designers from varying backgrounds — all part of the Point Card team. Sharing perspectives on concepts in design, finance, and culture through an everyday lens.
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