What is a Secured Credit Card?
A secured credit card is a type of credit card backed by a cash deposit from the cardholder. This deposit acts as for the account, providing the card issuer with security in case the cardholder defaults on their payments.
How a Secured Credit Card Works
When you open a secured credit card, you are required to make a refundable security deposit. In most cases, the amount of the deposit becomes your credit limit. For example, if you deposit $300, you will have of $300.
Once the account is open, you use the card to make purchases just as you would with any normal, unsecured credit card. You will receive a monthly statement, and you are required to make at least the minimum payment by the due date. The issuer does not use your deposit to pay your monthly bill; the deposit simply sits in a reserve account.
Secured vs. Prepaid Debit Cards
A common misconception is that secured credit cards and prepaid debit cards are the same. They are fundamentally different financial tools.
| Feature | Secured Credit Card | Prepaid Debit Card |
|---|---|---|
| Uses Borrowed Money? | Yes. You borrow against the limit and pay it back. | No. You are spending your own loaded funds. |
| Reports to Credit Bureaus? | Yes. Builds credit history. | No. Does not affect your credit score. |
| Monthly Bill? | Yes. Must pay at least the minimum due. | No. When funds run out, the card declines. |
Graduating to an Unsecured Card
The goal of having a secured credit card is eventually to not need it. If you demonstrate responsible usage—meaning you pay your bill on time, every time, and keep your utilization low—the card issuer will eventually "graduate" your account to an unsecured card.
When you upgrade to an unsecured card, your initial security deposit is refunded to you, either as a statement credit or a check in the mail.
