Secured Credit Cards Explained

Amy Pennza
woman purchasing items with credit card

It's nearly impossible to get by without credit. Even if you rarely use a credit card for purchases, you will have a tough time booking a hotel room or renting a car without one. Responsible credit card can boost your credit score, which can help you qualify for additional credit at the best interest rates. If you don't have a credit history, or your credit score has suffered serious damage, a secured credit card might be your ticket to a brighter financial future.

Secured Credit Cards

Secured credit cards offer many of the same benefits as unsecured credit cards. You can use them to make purchases, shop online, hold hotel reservations, serve as rental deposits on cars or for anything else that requires a credit card. However, a secured credit card account differs from an unsecured credit account in several ways.

This type of card may be a good alternative for someone who does not have a credit history or finds it difficult to get approved for an unsecured credit card. By opening a secured account, the cardholder can begin building a credit history by making small purchases and paying them off on time every month.

Getting a Secured Credit Card

To obtain a secured card, you must deposit a set amount of cash up front. This deposit helps reduce the lender's risk when extending credit to someone with little or no positive credit history. While most lenders will dictate the amount of your initial deposit, in some cases you can deposit as much as you would like -- up to a set limit. The deposit remains with the lender as long as the account remains open.

Using a Secured Credit Card

Secured credit cards function in much the same method as traditional credit cards. The difference lies in the security deposit. The deposited funds remain in an account with the lender. You don't actually use these funds. Instead, they act as collateral for the money you borrow.

You use the card as a revolving credit line. Whatever purchases you make accumulate over a statement period with the lender. Depending on the terms of the card, you may be able to charge up to the deposited amount. At the end of each billing cycle, your lender sends you a statement describing your purchases. Once you receive your statement, you can choose to pay the entire balance or make a minimum payment. You don't have to pay off the balance in full each month, but the lender will charge interest if you carry a balance past the grace period.

If you default on paying back the money you owe, the lender can use the deposit to pay what you owe.

Rebuilding Your Credit

Secured cards can help you boost your credit score if the lender regularly updates information with the major credit reporting agencies. Some lenders will extend additional credit to those who qualify after a few months of using the initial limited balance, and in some instances the lender will eventually offer fully unsecured cards to account holders with excellent payment histories on their secured cards.

Popular Secured Cards

There are a number of secured credit cards on the market, each with its own benefits and downsides. The type of card you choose will depend on your lifestyle and spending habits. Interest rates and fees vary considerably, so it's important to shop around before applying.

Citi Secured MasterCard

This lender reports cardholders' positive payment history to the credit bureaus, which can raise your credit rating. If you need to rebuild your credit score, the Citi Secured Card can be a good option.

Benefits

Unlike other secured cards, which require cardholders to deposit money into a non-interest bearing account, Citi invests your security deposit in an interest-generating Certificate of Deposit. The annual fee is just $29, which is much lower than competing cards. If you pay consistently and on time for 18 consecutive months, Citi will upgrade your account to a better card.

Drawbacks

If you can't commit to paying off your balance every month, the Citi card might be a bad choice. The interest rate is 18.24%, which will cost you a lot of money in the long run if you maintain a sizable balance.

How to Apply

Citi doesn't offer the card online. You must visit your local branch to fill out an application.

Capital One Secured MasterCard

Borrowers get the most bang for their buck with the Capital One card.

Benefits

Borrowers pay just $49 in exchange for a $200 credit limit. The annual fee is reasonable at $29 per year.

Drawbacks

The annual interest rate is a whopping 22.9%, which can add up if you plan on carrying a balance. It's also a variable rate, which can go up at any time.

How to Apply

To fill out an application online, visit Capital One's website.

Wells Fargo Secured Visa

As long as you haven't filed for bankruptcy within the past year, you can obtain a Wells Fargo card regardless of your credit history.

Benefits

If your credit score is truly shot, the Wells Fargo card is a great option. Once approved, you're entitled to all the same benefits as regular Visa cardholders.

Drawbacks

The security deposit, which ranges between $300 and $10,000, might be out of reach for some people.

How to Apply

Apply online at the Wells Fargo website.

First Premier Bank MasterCard

The First Premier Bank MasterCard caters specifically to individuals with lower credit scores.

Benefits

The approval process takes just 60 seconds. The card also features a 27-day grace period.

Drawbacks

This credit card is riddled with fees. To open a new account, the cardholder is assessed a one-time processing fee of $95. The annual fee is $75 up front and $45 each year after that. Because of the excessive start-up cost of $170, credit card expert Beverly Harzog only recommends this card if there are no other alternatives.

With a 36% annual interest rate, cardholders should also avoid carrying a balance.

How to Apply

To apply for the First Premier Bank MasterCard, complete an online application or call 1-800-987-5521.

US Bank Secured Visa

This card offers customers the ability to earn interest on their security deposits.

Benefits

Although the 20.99% interest rate is not great, it is lower than some of the other options available. The grace period may be up to 30 days depending upon the terms of the card, which is a longer grace period than is typical with secured cards.

Drawbacks

There is a $35 annual fee associated with this card.

How to Apply

Apply online through the US Bank website.

How Cards Stack Up


First Premier Bank MasterCard

Citi Secured MasterCard

Capital One Secured MasterCard

Wells Fargo Secured Visa

US Bank Secured Visa
APR 36.0% 18.24% 22.9% 18.99% 20.99%
Grace Period 27 days 20 days 25 days 25 days 24-30 days
Activation Fee $95 $0 $0 $0 $0
Annual Fee $75 (first year), $45 (subsequent years) $29 $29 $25 $35
Monthly Maintenance Fee $0 (first year), $75 (subsequent years) $0 $0 $0 $0

Choosing the Right Card

A bad credit score can keep you from qualifying for a mortgage or a car loan. Rebuilding your credit with a secured credit card might take some time, but the results will be well worth it. By choosing the best secured card for your financial goals, you can repair your credit rating while taking advantage of all the benefits traditional credit cards offer.

Secured Credit Cards Explained