Secured credit card

What It Means

A secured credit card works like any credit card, except you put down a cash security deposit when you open it. The deposit usually becomes your credit limitCredit limitThe most your card company lets you owe on a credit card or line of credit at one time. See more, so $200 down typically means a $200 limit, and the card company can keep it if you stop paying. Because the deposit lowers the company's risk, a secured card is easier to get with little or damaged credit, and paying it on time is one way to build a credit historyCredit historyThe record of how you've handled credit over the years, as shown on your credit reports: which accounts you've had, for how long, and whether you paid on time. See more. You still get a monthly bill, and a balance you carry past the due date collects interestInterest rateThe yearly percentage a lender charges for borrowing money, not counting fees; the APR adds certain fees to show a fuller cost. See more.

How People Say It

• "I put down three hundred to get the card."
• "It's a secured card until they upgrade me."
• "The deposit doesn't pay the bill, you still pay monthly."

The Breakdown

A short example. Jordan is 23, has no credit history and gets turned down for a regular card. So he opens a secured card with a $300 deposit and gets a $300 limit. Each month about $100 goes on it: his $55 phone bill and some gas.

Where it goes wrong. In the second month Jordan spends $280 before the statement closes, so his statement shows more than 90% of the limit in use. In the third month he assumes the deposit will cover the bill and skips the payment. Experian says the deposit can't be used to make your monthly payments, and a payment 30 days past dueDelinquencyBeing behind on a required payment; in credit reporting, an account becomes a reported delinquency once a payment is at least 30 days past due. See more can be reported to the credit bureausCredit bureauA company that collects information about how people use credit and sells it as credit reports; Equifax, Experian and TransUnion are the three nationwide ones. See more, the reverse of what the card was for.

What to watch for

• Pay every statement on time; the deposit is there in case you defaultLoan defaultFailing to repay a loan as the contract requires, usually after missed payments, which lets the lender use stronger ways to collect. See more, and it doesn't count as a payment.
• Keep the balance small compared with the limit, since high balances raise utilizationCredit utilizationThe share of your available revolving credit you're using, found by dividing your card balances by your credit limits. See more and, as Experian notes, that can hurt scores.
• Use the card a little each month and pay it off, since an unused card builds little history.
• Before you apply, ask whether the issuer reports to all three credit bureaus and whether it reviews accounts for a move to an unsecured card.
• Read the fee schedule, because fees can come out of the deposit you get back.

Good to Know

Experian explains that you get your deposit back when you pay off and close the account, or when the issuer moves you to an unsecured card, minus anything still owed and any fees. Late paymentsLate paymentA payment that reaches the lender after its due date; on credit reports, one that's 30 days or more past due. See more on a secured card are reported like any other card's: Experian and Equifax say lenders generally report a missed payment once it's 30 days past due. A secured card is still credit, so the usual card rules apply, including the federal limits on late fees and the right to a statement ahead of each due date.

Related Terms and Categories

• Credit builder loan

  A small loan that's held in a locked account while you repay it, so your on-time payments build a credit record before you receive the money.

• Credit utilization

  The share of your available revolving credit you're using, found by dividing your card balances by your credit limits.

• Credit limit

  The most your card company lets you owe on a credit card or line of credit at one time.

• Secured debt

  Money you owe that's backed by collateral, such as a home or car, which the lender can take if you don't repay.

• Payment history

  The record in your credit reports of whether you paid each credit account on time, late or not at all; it's about 35% of a FICO Score.

• Authorized user

  A person the cardholder lets carry and use a card on their credit card account, without being legally responsible for the bill.

Debt and credit