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WalletPrep worksheet · Credit

How does a secured credit card work?

Name ____________________ Date __________

Key ideas

  1. Your deposit usually sets your limit. Lee deposits $500 and gets a $500 limit. Some cards take a deposit that covers only part of the limit.
  2. Pay in full and it costs nothing. Paying the whole statement balance by the due date avoids interest. Carrying $300 at an assumed 28% APR costs Lee $46.
  3. It only builds credit if it reports. Ask whether the issuer reports to all three bureaus. Payments that aren't reported don't add to your credit history.

Vocabulary

Secured credit card
A credit card backed by a cash deposit you make up front, usually equal to your credit limit. It is a common first card for building credit.
Credit score
A 3-digit number, usually from 300 to 850, that predicts how likely you are to repay debt on time. Lenders use it to set rates.
Credit bureau
A company that collects your credit history and sells reports to lenders. The three nationwide bureaus are Equifax, Experian and TransUnion.
Annual fee
A yearly charge some credit cards add to your bill just for having the card, whether you use it or not.
Credit report
A record of your credit accounts, payments, balances and some public records, kept by each of the three credit bureaus.
Credit union
A not-for-profit financial cooperative owned by its members, offering checking, savings and loans much like a bank.

Work it out

Lee has no credit history. She deposits $500 on a secured card with no annual fee and puts her $45 phone bill on it each month.

  1. Deposit
  2. Credit limit
  3. Phone bill on the card
  4. Share of limit used
  5. If she carried a balance
  6. Interest at 28% APR, $30 a month
  7. Total repaid over 12 months

Check yourself

  1. Lee has a $500 limit and a $120 balance. What share of her limit is she using?

    • A. 12%
    • B. 24%
    • C. 30%
    • D. 50%

  2. Why does a secured card build credit when a prepaid card doesn't?

    • A. It always has a higher limit
    • B. Prepaid cards are illegal for that
    • C. You borrow and repay, and many issuers report it
    • D. It charges interest every month

  3. When do you usually get a secured card deposit back?

    • A. When you pay off the balance and close the account, or upgrade
    • B. After your first on-time payment
    • C. Never, it becomes a fee
    • D. Automatically after 6 months

Your turn

Compare two or three secured cards from your bank, a credit union or another issuer. Check the annual fee, the APR and whether they report to all three bureaus. Pick the one with no annual fee and full reporting.

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Answer key

How does a secured credit card work?

Work it out

  1. Deposit$500
  2. Credit limit= $500
  3. Phone bill on the card$45
  4. Share of limit used9%
  5. If she carried a balance$300
  6. Interest at 28% APR, $30 a month$46
  7. Total repaid over 12 months= $346
  1. Her $500 deposit gives her a $500 limit. A $45 bill uses $45 ÷ $500 = 9% of it, well under 30%.
  2. She sets autopay for the full statement balance, so she pays no interest and never misses a payment.
  3. If she carried $300 instead at an assumed 28% APR, paying $30 a month would take 12 months and cost $46 in interest.

Check yourself

  1. B. 24% $120 ÷ $500 = 0.24, or 24%. That's under the 30% that experts advise.
  2. C. You borrow and repay, and many issuers report it A secured card is a credit card. Your borrowing and payments can be reported to the bureaus, while a prepaid card only spends money you loaded.
  3. A. When you pay off the balance and close the account, or upgrade The FTC says you usually get the deposit back when you pay off and close the account. Some issuers return it when they upgrade you, but not on a fixed schedule.