How does a secured credit card work?

A secured credit card asks for a cash deposit up front, often equal to your credit limit, and then works like a regular credit card. If the issuer reports to the credit bureaus and you pay on time, it builds a credit history you can use to get a regular card later.

The deposit backs the card

The FTC says you usually deposit a percentage of your credit limit, sometimes up to 100%. The issuer holds it so it still gets paid if you don't pay.

It is a real credit card

You borrow, get a monthly bill and pay it back. The card has the same legal protections as other credit cards, including a $50 cap on losses from unauthorized use and the right to dispute errors.

The deposit comes back

You usually get the deposit back when you pay off the balance and close the account. Some issuers also move you to a regular unsecured card after a run of on-time payments.

Fees can be higher

Secured cards generally, but not always, have higher APRs and annual fees than unsecured cards. Compare fees before you apply, since there are cards with no annual fee.

How the deposit and limit work

When you're approved, you send the issuer a deposit, often a few hundred dollars. The CFPB gives the example of $500: you can then spend up to $500 on the card, and each payment frees up that much room again.

The deposit is not a prepayment. You still get a bill each month, and you still owe what you charge. The issuer only takes money from the deposit if you stop paying, which would also hurt your credit, so treat it like any other card.

How it builds your credit

Credit scores are built from your credit reports. When the issuer reports your account to the three nationwide bureaus, each on-time payment adds to your history. The CFPB lists secured cards among the products that can help you start or rebuild credit for that reason.

Debit cards and prepaid cards don't do this. With them you spend money you already have, so there is no borrowing to report. That's the main difference between a secured card and a prepaid card, even though both start with your cash.

Using it without paying interest

On most cards, you pay no interest if you pay the full statement balance by the due date. That matters more on a secured card, where APRs tend to be high.

Keep the balance low too. The CFPB says experts advise using no more than 30% of your total limit. With a small limit, one big purchase can push you over that, so a single small recurring bill works well.

Moving up to a regular card

Many people use a secured card for a while and then switch to an unsecured card, either from the same issuer or a new one. Some issuers review accounts for an upgrade, and if they upgrade you, the deposit is returned.

Don't count on a set date. In a 2019 review, the CFPB found card issuers that told customers their secured cards would automatically upgrade after 6 or 12 months when they did not. Ask the issuer in writing how and when it reviews accounts.

When you upgrade or open a new card, think twice before closing the secured card. The CFPB warns that closing cards can hurt your score if it leaves you using a high share of your remaining limits.

Other ways to build credit

A credit builder loan from a bank or credit union is another option. The money is held for you while you make small payments, often over 6 to 24 months, and you get it at the end.

Becoming an authorized user on a family member's card can also add history, as long as they pay on time. Payday loans and buy here, pay here car loans usually don't help, because they often don't report on-time payments.