A feature that separates secured credit cards from unsecured credit cards is that the former requires a security deposit. This deposit is a form of collateral.
The minimum deposit for a secured credit card varies. Some banks will approve your application with a minimum security deposit as low as $250, whereas other banks allow security deposits up to $1,000.
What’s interesting about the security deposit is that it determines your credit limit. In other words, if you give the bank a $500 deposit, you’ll get a secured credit card with a $500 credit limit. Personally, I recommend Chime’s Credit Builder Secured Visa because there’s no minimum security deposit required. There’s also no credit check, no annual fee, and no interest.
Is a secured credit card the same as a “prepaid” card?
Even though you’re required to pay a security deposit, a secured credit card is not a prepaid card.
You’re not preloading money on a card for later use. Rather, these are actual credit cards. They have interest rates, late fees, and you’re required to pay back all charges.
You’ll receive a monthly statement each month, and you’re required to make a minimum payment each month.
The bank issuing your card deposits your security deposit into an interest-bearing account, and they’ll only touch these funds if you default and don’t repay what you owe.
A secured credit card is a steppingstone to an unsecured credit card. Once you’re approved for a secured credit card, it’s important that you make timely payments each month. This builds a positive credit history.
This is important because after 12 to 24 months, the bank issuing your secured credit card will review your account. If you’ve demonstrated an excellent payment record, they may convert your secured credit card to an unsecured credit card, and then refund your security deposit.
How to build credit with a secured credit card?
- Don’t carry a balance from month-to-month. This is a credit card, so it’s possible to accumulate a high balance. To avoid high debt, pay off your secured credit card balance in full every month. Only charge what you can afford to pay back.
- Compare interest rates. Secured credit cards often have higher interest rates than unsecured credit cards. This is costly, if you carry a balance. Before applying for a card, shop around and compare rates and terms.
- Use a bank that reports to the credit bureaus. The purpose of a secured credit card is to build or reestablish your credit history. Therefore, choose a bank that regularly reports your credit activity to the three major credit bureaus (Experian, TransUnion and Equifax).
Ready to apply for a secured credit card?
Now that you know how secured credit cards work, go ahead and submit an application for one. You need credit to build credit, and a secured credit card is a pathway to a stronger credit history–opening the door to more attractive offers.
