Secured Credit Card Deposits

Introduction

A secured credit card is a good way to build credit if you have little or no credit history. But there’s one major difference between a secured and an unsecured, or traditional, credit card. To use a secured credit card, you have to make a security deposit first.

This deposit is typically equal to the credit limit of the secured credit card and acts as collateral to minimize the card issuer’s risk.

On the surface, this process of making a deposit before you can use a card sounds similar to how a debit card or prepaid card works. But there’s a big difference between those products and a secured credit card.

With a debit card, the money for any purchases you make is automatically deducted from your bank account. And with a prepaid card, you’ve pre-loaded money on to that card so you can spend it down.

But, with a secured credit card, your deposit is collateral for a credit line. So, you use your card’s credit line to make purchases and then make payments when they’re due.

That’s one of the major reasons to get a secured credit card — to make consistent, on-time payments for your purchases, which can help you build a positive credit history. Your security deposit is there just in case you fail to pay back the card issuer. If that happens, they can use your security deposit for reimbursement.

Since it’s the security deposit that differentiates a secured credit card from an unsecured card, let’s take a closer look at that deposit.

The Amount of a Security Deposit

Theoretically, the amount of a security deposit on a secured credit card could be for any amount. In reality, however, the minimum amount of a security deposit is typically $200. Some secured cards let you select your deposit amount, which will then likely also be your credit line, while other cards offer only pre-set limits.

Even though your initial credit line with a secured credit card is usually equal to the amount of your security deposit, that’s not always the case. Certain secured cards may offer you a credit line that’s higher than your deposit if the card issuer is willing to assume more risk. You may also be extended a higher credit line once you’ve demonstrated that you can be counted on to make consistent, on-time payments. But, if you’re just starting out with a secured credit card, expect your credit line to be equal to your security deposit.

Can you increase your credit limit by adding more to your deposit?

Some credit card companies let you add money after your initial deposit to increase your credit limit. Policies for if, when, and how you can add to your deposit vary between card issuers, so you’ll want to review your card’s terms.

Increasing your credit line comes with some potential benefits. The immediate advantage is having more credit available, which can make using your card more practical.

Having a higher limit can also help your credit utilization ratio — this term refers to how much of your credit line you actually use. Experts recommend using 30% or less of your available credit to potentially help your credit score.

When Do You Have to Make a Security Deposit?

Just like with an unsecured credit card, applying for a secured card involves filling out an application with personal and financial information such as your Social Security number and your income.

The order can vary slightly, but you’ll typically apply for a secured card, receive your approval, and then submit the security deposit.

In other cases, you might apply, submit your security deposit, and then get approved. Some secured credit cards may even approve you and allow a certain amount of time to make your security deposit before the approval is withdrawn.

Since there’s very little risk for the card issuer thanks to the security deposit requirement, the approval part is typically a formality.

What payment methods are accepted for deposits?

Most card issuers will have at least a few deposit options for secured credit cards, but it’s best to verify with the specific issuer. Common methods include making a transfer from a bank account, using a debit card, and sending a money order or personal check.

Cash funding is less common, but some issuers may accept cash deposits at a local bank or credit union branch. Funding with another credit card is generally not allowed.

Processing times vary across issuers and methods, so expect it to take at least a few days for the deposit to clear.

Do You Get Your Security Deposit Back?

In most cases and with most secured cards, you should get your deposit back. Typically, you’ll get your money back once you’ve closed the account and any outstanding balance has been paid in full. You should also get your deposit back if you convert your secured credit card to an unsecured card with the same card issuer. And with some issuers, your deposit may earn interest, which you’ll also receive along with your returned deposit.

But don’t expect to get your deposit back if the card issuer closes your account for nonpayment and has to use the deposit to cover it. In that case, the card issuer will likely close your account, you’ll lose your deposit, and your credit score will probably take a hit.

The precise timing and terms of when, if, and how your security deposit may be refunded should be spelled out in your cardmember agreement.

Pros and Cons of Secured Credit Card Deposits

There are a handful of factors you might want to think about if you’re considering a secured credit card.

Pros of secured credit card deposits

• Fairly easy approval: A security deposit allows people with a limited credit history or no credit history to get approved for a credit card.

• Enables credit building: A secured card is a great tool for building or rebuilding credit history and a card’s security deposit opens the door to that.

• Reduced risk for issuers: On the other side of the coin, the deposit on a secured card gives the lender collateral, which protects them if the cardholder can’t pay.

Cons of secured credit card deposits

• Upfront initial cost: Since you need to make the deposit to get started, there could be a relatively high cost to funding a secured card.

• Lower limits than unsecured cards: A secured card’s credit limit is determined by the amount of the deposit and issuers may have a limit on how much you can deposit. Unsecured cards can potentially have far higher limits.

• Possible fees: Depending on the issuer, secured cards may come with fees, like annual fees or foreign transaction fees. While this isn’t specific to the deposit, a card’s annual fee could eat up a portion of your credit line for the month it’s charged.

FAQs About Secured Credit Card Deposits

What is the minimum deposit required for a secured credit card?

The standard starting deposit is usually around $200. Some card issuers might let you start with less, while others may require more.

Can I get my deposit back if I close my account early?

Yes, you should get your deposit back as long as the card’s balance is zero. Otherwise, the bank will typically use your deposit to pay off the remaining balance first.

Does a larger deposit improve my approval chances?

Putting down more money does not make it easier to get approved. A larger deposit only gives you a potentially higher spending limit.

How long does it take to get a deposit refunded?

Refund times vary across issuers, but you can typically expect to wait between 30 to 90 days to get your secured card’s deposit back.

Can I lose my deposit on a secured credit card?

Yes, you will lose your money if your account defaults due to missed payments. Since your deposit acts as collateral, the card’s issuer will take your deposit to cover what you owe them.

Do secured credit cards earn rewards?

Yes, some secured cards offer cash back rewards or points on your purchases.

Can I switch from secured to unsecured without closing my account?

This depends on the issuer, but many banks will convert a secured credit card account to unsecured and refund your security deposit after you’ve developed history with them.

Bottom Line

By minimizing a card issuer’s risk, a security deposit makes a secured credit card possible. And secured cards offer another option to people without good enough credit to qualify for an unsecured credit card.

Think of the deposit as an investment in your credit future. If you invest your deposit into a secured credit card and use that card strategically, you can build a positive credit history. Then, you can be rewarded down the line with the opportunity to move up to an unsecured credit card and get your deposit back — sometimes with interest.

Curious to see if you pre-qualify for a Credit One Bank credit card? Find out in less than a minute — without harming your credit score.