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Secured Credit Card Basics

Think a secured credit card might be right for you? Confused about the differences between secured credit cards and unsecured credit cards? Or the difference between secured credit cards and debit cards?

Eliminate some—and hopefully all—of any confusion about secured credit cards by checking out these six facts. They could help you decide whether applying for a secured credit card is in your future.


1. Secured Credit Cards Are Not Just for People with Bad Credit

If you have bad credit and are looking to start rebuilding it by creating a positive payment history, the most important factor in determining a credit score, then a secured credit card, depending on the card (see #5 below), could be the way to go.

But there’s also a segment of folks out there who don’t have bad credit—they have no credit score. These people may choose a secured credit card to help them build credit history, not rebuild a history that’s not good. We’re talking college students, recent college graduates, or anyone who just never bothered to apply for credit before. With no credit history, you may not even have a credit score. If this is your situation, a secured credit card could be the first step of your credit journey. Responsible use of a secured card could pave the way to an unsecured credit card or other forms of credit down the road. 


2. A Secured Credit Card Is Not the Same as a Debit Card

You may think that, if you’re giving a secured credit card issuer a $500 deposit and your credit line is $500, then you’re basically making purchases with your $500, same as with a debit card. But that’s not the case.

With a debit card, you are literally withdrawing your money from your bank account tied to that card whenever you make a purchase. But, when you make a purchase with a secured credit card, the card issuer pays the merchant for the purchase, and you are obliged to pay them back, same as with an unsecured credit card. Your security deposit, which resides in a separate reserve account, is there as collateral should you default and the card issuer closes your account. Then, once your account has been closed, they can recoup part or all of the balance you owe them from your security deposit.   

The other big difference between a secured credit card and a debit card is that a debit card does not report your activity on the card to any of the 3 major credit bureaus (Experian®, Equifax®, and TransUnion®). Many—but not all (again, see #5 below)—secured credit cards report your activity on the account to one or all of the major credit bureaus, which can help you to build a credit history. In fact, this is one of the primary reasons people apply for a secured credit card in the first place.

Finally, a secured credit card may also offer many of the benefits credit cards offer over debit cards, including better protection against fraud in the form of potentially lower consumer liability, purchase protection, travel insurance, and rewards on eligible purchases. While there are some debit cards out there that offer rewards, they are rare.


3. A Secured Credit Card Works Basically the Same as an Unsecured Card

When you apply for a secured credit card, the card issuer may or may not check your credit history, generating a hard inquiry, before deciding whether or not to approve you for their card. If you are approved, unlike with an unsecured credit card, you will be required to make a security deposit before you can use the card. Some secured credit cards require your deposit when you apply for the card, while others require you to make your deposit after you receive the card but before it can be activated.

Once your card is activated, it works pretty much the same as an unsecured credit card. You make purchases with the card, receive a statement at the end of your billing cycle, and you are required to make at least the minimum payment and to ensure that the card issuer receives your payment by the payment due date. Just like with an unsecured credit card, your card may or may not have a grace period. If it doesn’t, you will be required to pay interest on all of your purchases. If it does, you will be charged interest at an APR specified in your credit card agreement on any balance still owed after your payment is deducted. Your secured credit card may also assess fees like an unsecured card, including application fees, late payment fees, annual fees, and more.

If you miss a payment or pay less than the minimum amount due with a secured credit card, that amount is not deducted from your security deposit. The card issuer holds that deposit in a separate reserve account as collateral. A missed or short payment will be considered past due, and you will still owe any outstanding amount plus any fees and interest. It’s only after you default and the card issuer closes your account that they deduct any amount you owe them from your deposit. But you don’t want things to get to that point—especially if you got a secured credit card to help you build a positive payment history. So make every effort to pay at least the minimum amount due on time, every time.      


4. You Should Get Your Security Deposit Back If You Don’t Default

Since the security deposit you put down on a secured credit card is collateral, if you make your payments on time, every time and the account stays open, the card issuer should not need to touch your deposit. Your security deposit will typically be refunded once you’ve paid your account balance in full and closed the account. Or, you should get your deposit back if and when you convert the secured card into an unsecured credit card with the same card issuer. The exact refund timing and process should be spelled out in the terms and conditions of your credit card agreement. 

Should you default and the card issuer closes your account, your outstanding balance (including any fees, interest, and penalties you’ve accrued) will be deducted from your security deposit. If there’s anything left of your deposit after that, you should get it back.


5. Not All Secured Cards Report Your Account Activity

If you’re getting a secured credit card to help you build a positive payment history, it’s critical you verify that the card issuer for the secured card you’re applying for reports your activity on the account. If they don’t, then that particular card is not going to help you build or rebuild your credit.

Some card issuers may only report monthly to one or two of the major credit bureaus instead of all three, while others may report to any or all of the bureaus every few months instead of monthly. Still others may not report your activity at all, because it’s not mandated by law that secured credit cards—or unsecured credit cards—report your information. Even worse, some card issuers may only report derogatory information, such as late payments, which only helps you to build a negative payment history.

Reporting to the credit bureaus is strictly voluntary. So do your homework and ask the card issuer if they will be reporting your activity on the account and, if so, how often and if it will be to one, two, or all three of the major credit bureaus.    


6. You’re Not Guaranteed to Be Approved for a Secured Credit Card

You may think, because you’re providing collateral for any purchases you make with a secured credit card, that being approved for secured card is a done deal. But it isn’t.

Depending on the card issuer, there may be some financial black marks from your past or circumstances from your present life that they’re not willing to overlook. Reasons for being denied could include, but are not limited to, having a bankruptcy, insufficient income, just starting a new job, or a less-than-positive payment history on current accounts like student loans.  


Want to know more about secured credit cards? Read all about how they work, using secured cards to build credit, the differences between unsecured credit cards and secured cards, and how secured credit card deposits work right here on Credit One Central. 

This material is for informational purposes only and is not intended to replace the advice of a qualified tax advisor, attorney or financial advisor. Readers should consult with their own tax advisor, attorney or financial advisor with regard to their personal situations.