Secured credit cards are designed for people with bad, limited or no credit history and use a security deposit that doubles as a credit limit to protect issuers from what are considered to be risky customers. If you do not have an outstanding balance at the time you decide to close your secured credit card, the entire security deposit is returned to you. Because issuers incur little risk with secured cards, these products typically also have low fee structures and minimal requirements for approval. All you generally need to do to open a secured credit card is provide a valid Social Security Number (SSN) and, of course, place the refundable security deposit.

Using a secured credit card is ultimately a great way to cost-effectively build or rebuild a solid credit history since secured cards report to the major credit bureaus in the same manner as any other credit card. In fact, no distinction is made between secured and unsecured credit cards on a credit report. Finally, since you can add to your deposit over time and thereby increase your spending limit, a secured card can also provide all the spending power you might need.

Frequently Asked Questions:

1. Who should apply for a secured credit card?
2. How can I get a secured credit card?
3. How much should I deposit on a new secured credit card?
4. What’s the best way to use a secured credit card in order to build credit?
5. Do I need to actually use my secured card in order to improve my credit?
6. What are the fees or risks associated with a secured credit card?
7. How long do I need to have a secured credit card before I am eligible to apply for an unsecured card?
8. How do I move from a secured credit card to an unsecured credit card?

Who should apply for a secured credit card?
If you are new to credit, or have had some credit trouble in the past, a secured credit card is a great option for you. No matter what your credit is, you will get approved for a secured card.

No or Limited Credit History: Without credit history to serve as proof of your fiscal responsibility, it’s unlikely that you will get approved for a regular (i.e. unsecured credit card). Credit card companies have no reason to believe you would pay them back for the money you’d spend with an unsecured card, after all, because you don’t have a track record of doing so. However, you shouldn’t have any problem opening a secured credit card, given that the security deposit you are required to place protects issuers against default. By using a secured credit card responsibly (i.e. making on-time payments), the credit history you build should be sufficient to qualify you for an unsecured credit card. You might be surprised at the number of consumers who fall within this category, as it not only includes college students and recent immigrants, but also widows and divorces whose credit may have been under their spouse’s name.

Damaged Credit History: If you have bad credit (no matter how bad it may be), a good way to start rebuilding it is through a secured credit card account. Your spending limit with a secured credit card is equal to the deposit you place in opening it, which means both that approval is basically guaranteed because your issuer isn’t incurring any risk and that you won’t be able to spend beyond your means. If you’re worried about making your payments or falling into bad habits, you can still open a secured credit card and activate it without ever actually using it. Even though there is no activity on your account, you’re still reported to the credit bureaus as being on time with your payments (you can’t be late since you didn’t have any to make in the first place). Since you will constantly be current on your payments, you will continue to be reported as being in good standing on your account, therefore improving your credit score. The only thing you have to do is remember to pay your membership fee once a year, and the rest will take care of itself.

Plastic-necessary purchases: Secured cards are also great for people who want to be able to rent cars and book hotel rooms as well as shop online but don’t trust themselves to use an unsecured credit card.

How can I get a secured credit card?

You can get a secured credit card by going to your bank or credit union and asking for an application. However, not all banks and credit unions offer secured cards. You can also compare secured credit cards online and apply for one based on your comparison shopping. Annual fees, set-up fees and APRs vary from card to card, so it’s important to shop around to get the best deal.

How much should I deposit on a new secured credit card?

Most secured credit cards require a deposit of at least $200 and may limit deposits to $5,000 or $10,000. You can therefore deposit any amount in that range. It is important to note that the amount of your secured card deposit will serve as your credit limit, so the higher the security deposit you place, the more spending power you will have. Lenders also view lots of available credit favorably, so even if you do not have the cash to make a large deposit now, adding to your initial deposit over time might be a good idea.

What’s the best way to use a secured credit card in order to build credit?

Our recommendation is that you pay your secured credit card bill in full every month in order to both avoid any additional charges and make the most out of your card in terms of building your credit score. If you don’t think this is possible but still need a way to rebuild your credit score, we recommend that you open and activate your secured card, but don’t actually use it. Even though there will be no activity on your account, you will still be reported to the credit bureaus as being on time with your payments (you can’t be late since you didn’t have any payments to make in the first place).

Do I need to actually use my secured card in order to improve my credit?

No, you do not. After credit trouble, some people may be worried that they won’t be able to make their payments on their secured credit card, or may not trust themselves to use their credit card responsibly. Fortunately, you can open a secured credit card account, activate it, and still rebuild your credit even if you don’t use it. Even though there is no activity on your account, you’re still reported to the credit bureaus as being on time with your payments (you can’t be late when there’s no payment due). Since you will constantly be current on your payments, you will continue to be reported as being in good standing on your account, therefore improving your credit score. The only thing you have to do is remember to pay your membership fee once a year, and the rest will take care of itself.

What are the fees/risks associated with a secured credit card?

Secured credit cards usually have a membership fee that is assessed either annually or monthly. Some secured cards also come with an additional one-time-fee to set up the account. The fees and APRs for secured credit cards vary dramatically depending on the card, so it pays to investigate all your options. Our basic rule of thumb is to choose the card with the lowest fees.

A risk you should consider before getting a secured credit card is the possibility that you may lose your deposit if you default on your payments. You will be charged a late fee whenever you miss a payment on your credit card bill. Should the late fees become more than you can keep up with, you will default on your card and your credit card company will take your deposit. If you are worried about making your payments on time, you can avoid this situation by signing up for ACH. This will ensure that your payments are automatically withdrawn from your checking account each month without you having to think about it.

Our recommendation is that you pay your secured credit card bill in full every month in order to avoid any additional fees and make the most out of your card in terms of building your credit score. If you don’t think this is possible but still need a way to rebuild your credit score, we recommend that you open and activate your secured card, but don’t actually use it. Even though there will be no activity on your account, you will still be reported to the credit bureaus as being on time with your payments (you can’t be late since you didn’t have any to make in the first place).

How long do I need to have a secured credit card before I am eligible to apply for an unsecured card?

In short, it all depends on your credit history and payment behavior as well as your credit card company’s policies. Once you get a secured card, if you are responsible with your payments across all your creditors, most credit card issuers will qualify you for an unsecured credit card after about one year. On the other hand, if you have continued to max out your credit cards or have been unable to make your payments on time, it is unlikely that you will qualify for an unsecured card. In fact, you probably don’t even want one until you’ve gotten the hang of managing your credit with a secured card.

How do I move from a secured credit card to an unsecured credit card?

After you’ve proved your reliability and improved your credit score, there are three likely scenarios for making the transition from a secured credit card to an unsecured credit card. The first is that you close your secured credit card account completely after being approved for a new unsecured card. As long as you close your account in good standing and carry zero balance on the card, your entire security deposit will be returned to you. Generally your credit card company will send your money in the form of a check.

Another possibility is that your credit card company will offer you a credit limit increase on your secured credit card. In this scenario, your credit line will be increased above the amount of money you deposited, converting your secured credit card into a partially secured credit card. You will not get your deposit back until you close your now partially secured credit card completely with a zero balance.

The third possibility is that the credit card company will convert your existing secured credit card into an unsecured credit card without closing the account. In this case, you could either receive a check for your entire security deposit (as long as you carry zero balance on the card) or you could receive a statement credit in which your deposit is credited to your new unsecured account. A statement credit is rare, however, because credit card companies want to avoid having a customer carrying a negative balance. You could have a negative balance if, for example, you were carrying a balance of $150 on your secured credit card and then received a statement credit for your entire deposit of $400, bringing your balance to -$250.