If you have bad or limited credit, it can be difficult to get approved for traditional credit cards. Secured credit cards are an alternative that can help you build good credit through responsible use.

These are typically easier to get approved for than unsecured cards because they require security deposits. If your credit improves, you might be able to increase your credit limit or upgrade to an unsecured card.

Learn how secured credit cards work, how to choose one, and how they could help you build credit in our complete guide. Plus, find out how to close one if you're ready to move on.

How does a secured credit card work?

Secured credit cards are a type of credit card designed for those with a limited credit history, fair credit, or poor credit. They typically require a security deposit that serves as collateral for the card issuer.

Collateral guarantees that anything you borrow will be repaid.

Security deposits

Typically, the security deposit you provide for a secured credit card determines your credit limit and is usually equal to it. This reduces your lender's risk. You often have to deposit at least $50 to $300, but you can find secured credit cards with no minimum deposit requirement.

Card issuers typically keep your security deposit in a dedicated savings account. If you stop making credit card payments, your issuer may settle your balance with your deposit.

Credit limits

You can borrow up to your maximum credit limit with a credit card. And as you spend on a secured card, as with most credit cards, your available credit decreases. If you have a $200 credit limit and spend $50, your available credit is $150. When you make a $50 payment, you can spend up to $200 again.

You'll pay interest on the amount you borrow if you don't pay off your balance in full each billing cycle. Once you've borrowed, you must make regular monthly payments. Your credit card issuer will tell you the required minimum payment each billing cycle.

Credit reporting + credit impacts

Your payment activity and credit use with a secured credit card, including the amount of available credit used and your payment history, is often reported to each of the three major credit reporting bureaus. These are Equifax, Experian, and TransUnion.

If you're responsible and keep your account in good standing by paying on time, this can help you develop a positive credit history. If you miss payments or frequently carry a high balance, this could hurt your credit.

Who should consider a secured credit card?

Secured credit cards can be a valuable tool if you want to build credit or have bad credit. Many people apply for a secured credit card when they can't get approved for a traditional unsecured credit card.

If you have no credit history and have never borrowed before, or if you have a low credit score because of past missteps, a secured card may be your only option to get a credit card. This may be a far better and cheaper choice than other types of debt offered to bad-credit or no-credit borrowers, including high-interest loans.

Getting a secured card allows you to reap many of the benefits of being a credit cardholder. This includes putting deposits down on hotels and car rentals when using a debit card isn't possible, and having more flexibility in paying for purchases.

While secured cards typically don't offer the same perks as many traditional credit cards — such as 0% intro promotional APRs, generous rewards, or cash back — they are a great starter card option.

Pros and cons of secured credit cards

Do secured credit cards help build credit?

A secured card can help you improve your credit score if you choose one that reports to the three major credit reporting agencies and if you're responsible with how you use the card. The ability to build credit is one reason many people apply for a secured card in the first place.

Two of the most important factors that determine your creditworthiness are your payment history and credit utilization ratio.

You could build credit with a secured credit card by making on-time payments, keeping your credit utilization low, and leaving your account open.

Payment history

Payment history is reported when you make on-time payments on your card each month. If you make on-time payments for long enough, your credit score could improve.

Credit utilization

Your credit utilization ratio is the amount of credit you use relative to your available credit. If you have a secured card with a $500 limit and have used $100 of credit, your utilization ratio is $100 divided by $500, or 20%.

Experts recommend keeping your credit utilization ratio below 30%. This is high enough to show you're using your card and paying it off responsibly, but not so high you seem risky.

Since secured cards often have very low limits, it's important to keep your balance low. After you spend, pay it off.

How quickly can a secured card improve your credit?

You can't build good credit overnight. It takes time for positive payments and responsible borrowing to raise your score, and exactly how long depends.

When you have a record of negative remarks on your report, it's often going to take more time for positive borrowing behavior to impact your credit score. And depending on what negative information is on your report, those black marks could remain for as long as seven to 10 years. Your score can still go up during that time if you're responsible with new credit, but it will be slower.

If you're starting with no credit, getting a secured card could help you improve your credit score faster. You won't have negative info to overcome, so your record of positive behavior can help establish yourself as trustworthy.

How to choose a secured credit card

Not all secured cards are created equal, so it's important to shop around and find the best secured credit card for your needs. As you compare, consider the following:

• Security deposit requirements: When choosing an unsecured card, pay close attention to the minimum security deposit. Many unsecured credit cards require a minimum security deposit of $100 or $200. Look for a deposit minimum you can afford.
• APRs: Annual percentage rate is the cost to borrow. While you shouldn't generally carry a balance on a secured card, it's important to know the rate you'll be charged if you don't pay off your card in full each billing cycle.
• Card perks: Some secured credit cards earn rewards, but many don't. If you're interested in a card that offers perks, make sure the benefits are worth any added costs.
• Fees: Some secured credit cards have annual fees of around $50. However, there are also secured credit cards with low or no annual fees, so check out those options first. Some secured cards also have foreign transaction fees and returned payment fees.
• Reports to all three major credit bureaus: Make sure the credit card account offers regular credit reporting to all three bureaus so you get credit for your positive payment history.
• Automatic credit limit increases: Some banks offer automatic credit limit increases if you make all of your monthly payments on time and avoid late payments.
• Upgrades to a traditional unsecured credit card: Some banks also offer the opportunity to upgrade to an unsecured credit card over time.
• Free access to your FICO score: Viewing your credit profile can help you keep track of your progress toward your goal of improving your credit.

Secured credit cards we recommend

Secured credit cards vs. unsecured credit cards

Most regular credit cards are unsecured, which means the creditor has to rely on your promise to make payments. Creditors often screen out people likely to default, using your credit score and other metrics to predict your risk.

Secured credit cards lower a lender's risk. Since the lender has a legal ownership interest in the deposited money, it doesn't have to make collection calls, sue you, or garnish your wages to recover if you don't repay what you borrow. It's easy for the creditor to just take the money securing the card if you default. Because there's less risk, credit card companies are often more willing to give secured cards to people with bad credit or no credit.

Which one should you choose?

If you have a good or excellent credit score, you'd usually be better off with an unsecured credit card. You'd have more credit cards to choose from, including those with better rewards, and you wouldn't have to tie up money for a deposit.

But if you have a lower score or no credit, a secured card could be better for you. That's because people with imperfect credit can sometimes be classified by lenders as "subprime" borrowers, and card issuers often offer very unfavorable terms to subprime borrowers, such as extremely high interest rates and fees.

You'll need to see which cards you can qualify for to decide what's best for you. As you compare the costs of an unsecured versus a secured card, remember it can be far better to make a deposit you'll get back for a secured card than to incur a high annual fee you can't recover with a subprime card.

Secured credit cards vs. prepaid debit cards

Secured cards work differently from prepaid debit cards, though the two payment types share a few things in common.

Prepaid debit cards function as an alternative to a traditional checking account. You can sign up for a card and add money to it as needed. You don't have a line of credit, unlike with a secured credit card. You're simply spending money you've loaded. Since you aren't borrowing, prepaid debit cards don't report to credit bureaus.

With a secured card, you have to deposit money often equal to your credit limit. But you aren't "loading" your credit card. Rather, the money just stays in an account to protect the lender in case you default. When you swipe your secured card to pay for a purchase, you're borrowing from the card issuer and have to pay back what you borrow.

Tips to build credit with a secured credit card

Secured credit cards often report to the three major credit bureaus, so developing good credit habits could either help or hurt your score.

Here are the best ways to build a positive credit history with a secured card.

Keep your balance low

A low balance helps maintain a good credit utilization ratio. This is the ratio of your credit balances to your total credit limit. Your utilization for each card is important, as is your utilization across accounts. For both, aim for a ratio below 30%.

This means that if your credit limit is $300, you should aim to keep your balance at or below $90.

Pay your bills on time

It's imperative to show you're responsible with paying on time if you want your credit score to improve. A late payment on your secured card could hurt your score. Consider setting up automatic payments, so you don't risk forgetting.

Credit card issuers typically allow you to pay the minimum payment amount due, the statement balance, or a custom amount once per month. You need to pay at least the minimum to keep your account in good standing, but we recommend paying off the full statement balance to keep your credit utilization down.

Being proactive

Regularly reach out to your credit issuer to see if you can get your APR reduced, your credit limit raised, or your card converted to an unsecured card.

Steps to apply for a secured credit card

A secured credit card could help you build your FICO and other credit scores over time. Follow these steps to get started.

1. Choose a card

While not as plentiful as unsecured cards, you still have many options when choosing an unsecured card. Be picky, and look for one that aligns with your goals.

For example, some unsecured cards offer cash back or other rewards. Depending on your spending, some cards will be a better fit than others. You'll also want to consider factors like interest rates, fees, and security deposits.

2. Apply and pay a deposit

Once you've picked a card, apply for it online, over the phone, or via the card issuer's mobile app. When you apply, the card issuer will generally check your credit. This check is known as a hard inquiry or hard pull, and it usually dings your score by a few points.

Inquiries appear on your credit report and remain on your report for up to two years. Too many inquiries can hurt your credit, so you don't want to apply for lots of unsecured cards at one time.

When you apply, you'll provide your:

• Name
• Social Security number
• Monthly income

In some cases, you might receive an approval decision in a matter of seconds.

If you receive approval, your next step is to pay the security deposit. You can make a deposit via electronic funds transfer or debit to cover your credit line.

Typically, security deposits on secured cards are refundable. You can usually get the deposit back when you close your account or upgrade it to an unsecured card.

3. Use your card responsibly

The key to building your credit with a secured card is to use the card responsibly. Remember that the most important factors are payment history and credit utilization, so focus on these.

4. Monitor your credit

You should always monitor your credit score. You can request a free copy of your credit report from Experian, TransUnion, and Equifax once per week on AnnualCreditReport.com.

Most credit card issuers, and even some banking platforms, also offer free in-app credit monitoring services.

Should you close a secured credit card?

Unlike regular unsecured credit cards, secured credit cards are designed to be temporary.

Here are a few reasons you won't want to keep one open forever:

• Deposits: When you close the card, you can often get your security deposit back to use it for something more useful.
• Low credit limits: Most secured credit cards provide relatively low credit limits, while unsecured credit cards generally offer higher credit limits. A higher limit could help boost your credit score if you're not continually borrowing a large amount of your available credit.
• High interest and fees: Secured credit cards come with notoriously high interest rates that often fall around 25% or more. You might qualify for a better rate with another card if you apply after your credit has improved.
• Rewards programs: The best credit cards offer stronger rewards in the form of cash back or travel and can help you get more from your spending.

How does closing a secured card impact your credit?

Closing a secured card can hurt your credit, especially if you're working to build or repair it. Here are some factors that could take a hit:

• Credit utilization ratio: Since you'll have less credit available after you close your secured card, your credit utilization can change even if your spending doesn't. Make sure you know your combined limit after you cancel a card, because the amount of money you owe counts for 30% of your FICO score.
• Credit mix: If your secured card is your only credit card, you can expect a smaller drop in your credit score than if you have other cards open. Your credit mix — i.e., loans and revolving credit accounts like credit cards — makes up 10% of your credit score, which is why variety is good.
• Length of credit history: If you don't have any other older accounts listed on your credit report, you can expect a bigger drop in your score when you close your secured card. This factor makes up 15% of your credit score.

Steps to close a secured credit card

Secured credit cards are designed to get you to bigger and better places. When the time is right, take these steps to close your card.

1. Prepare for the closure

• Check the terms: Check the terms of your credit card agreement to know how to close your card and what happens to your security deposit.
• Change your bills: Change recurring charges for utilities and other bills to another payment method. If those don't go through, providers might charge returned payment fees or cancel your services.
• Redeem your rewards: If you have rewards to redeem, do so now to avoid losing them.

2. Contact your credit card company

Each credit card issuer has its own process for canceling secured credit cards. You might be able to do this by logging in to your account online, calling customer service, or even sending a letter by mail.

If you don't speak with a human directly, it's a good idea to ask for confirmation that they received your request and are processing it. Regardless of how you close your card, make sure to get a written follow-up.

3. Wait for your security deposit refund

Depending on your card issuer's policies, you might receive your security deposit refund in one of two ways:

• If your card has a balance when you close: The issuer may apply some or all of your deposit to the balance as a statement credit and send the remainder to you.
• If your card doesn't have a balance: You might get your deposit via a check or ACH deposit.

The time it takes for a deposit refund to process varies by credit card issuer. For example, Self Financial, Inc. says it'll return your deposit within 10 to 14 business days after you close your account.

4. Monitor your credit

Closing any credit card sets in motion a few waves of change that you'll want to keep an eye on. Here are steps to take after the closure.

• Check your credit score once every month to stay aware of changes.
• Check your credit report after a month to verify the account is marked "closed".
• Watch for recurring charges you might have forgotten to move.

5. Destroy your closed secured card

Run your credit card through a powerful shredder if you can, or at least cut it up into many tiny pieces. Secured credit cards are rarely metal, so disposal is easier.

How to turn a secured card into an unsecured one

Building your credit could help you upgrade to a traditional, unsecured credit card or qualify for unsecured credit cards from other card issuers. You could then take advantage of better rewards, more perks, and a credit line without a security deposit.

Before you pull the plug and cancel a secured card, check with your issuer to see if they can bump you up to an unsecured credit card. Many people aren't aware that this is an option, but it's a great way to extend the benefits of your existing card.

A major credit card issuer might let you upgrade to a regular unsecured credit card after a set period, such as six or 12 months. They may automatically upgrade your card after several consecutive months of responsible use. If not, ask the issuer directly about upgrading.

Upgrading can be a smart move because it generally appears as the same line of credit on your credit report. This means the length of your credit history won't change, and you won't need another hard credit check.

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Rates and fees

Current Offer

Discover will match all the cash back you’ve earned at the end of your first year.

Annual Fee

$0

Rewards Rate

Earn 2% cash back at Gas Stations and Restaurants on up to $1,000 in combined purchases each quarter, automatically. You'll still earn unlimited 1% cash back on all other purchases.

Benefits and Drawbacks

Benefits

• Automatically considers applicants for an upgraded unsecured card after 7 months
• $0 annual fee
• Earns bonus rewards for gas and dining out, the two most common expenses consumers have

Drawbacks

• You must make a security deposit that’s equal to your credit line, which can limit your overall credit line

Card Details

• No credit score required to apply. No Annual Fee.
• Your secured credit card requires a refundable security deposit, and your credit line will equal your deposit amount, starting at $200. Bank information must be provided when submitting your deposit.
• Automatic reviews starting at 7 months to see if we can transition you to an unsecured line of credit and return your deposit.
• Earn 2% cash back at Gas Stations and Restaurants on up to $1,000 in combined purchases each quarter, automatically. You'll still earn unlimited 1% cash back on all other purchases.
• INTRO OFFER: Unlimited Cashback Match for all new cardmembers—only from Discover. Discover will automatically match all the cash back you’ve earned at the end of your first year! There’s no minimum spending or maximum rewards.
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