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April 27th 2020

What is a secured credit card and how does it work?

A secured credit card is a popular choice for people that are new to U.S. credit, or working to rebuild their credit. Read our complete guide to see what's right for you.

Nova Credit is a cross-border credit bureau that allows newcomers to apply for U.S. credit cards, phone plans, and loans using their foreign credit history.

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Louis DeNicola
Personal Finance Writer

A secured credit card is a popular choice for people new to credit or working to rebuild their credit. If you're from certain countries like Canada, India, Mexico, Australia and the UK, you may be able to transfer your credit history to access products and services in the U.S., but for others opening a secured card can help you establish your credit and build a good credit score in the U.S. In this article, we explain key differences between secured credit cards vs. unsecured cards for those new to the American credit system.

How does a secured credit card work?

The primary difference between a secured and unsecured credit card is that secured credit cards require you send the issuer a refundable security deposit. The security deposit decreases the credit card companies' risk because it can close an account and hold onto the security deposit if a cardholder isn't paying the credit card bill. That's why card issuers feel comfortable offering secured cards to people who don't have a credit history, or who've made credit mistakes in the past.

A secured credit card is useful when you recently moved to the United States and can't transfer your credit score.

Did you know?

Secured credit cards can help you build credit!

Credit history used to stop at the border—until now. Your existing foreign credit history could help you establish credit in the United States.

Generally, your card's credit limit will equal your security deposit amount. For example, if you open a secured card you may have the option of sending the issuer a security deposit of $200 to $500 dollars. If you choose $300, your card's credit limit will be $300. Now, you can use your card however you'd like, but once you spend $300 you won't be able to make additional purchases until you pay down the balance. Some cards also let you make an additional deposit, above the minimum requirement, if you want to have a higher credit line.

Each month, you'll receive a bill for your credit card charges (plus interest charges and fees if they apply). The security deposit isn't for paying your monthly bill. This is important to remember because if you don't make at least your minimum monthly payments by the due date, the card issuer can still charge you late-payment fees. Once you're 30 days late with your payment, the card issuer can also report your late payment to the credit bureaus, which can hurt your credit history and credit scores.

As for whether secured credit cards help your credit, a secured credit card can help you establish and build credit if the card issuer reports your payments to the major credit bureaus: Equifax, Experian, and TransUnion. Most secured cards will report your payments to at least one bureau, but ideally, you get a card that reports to all three. Otherwise, you may be building credit history with one bureau but not the others, which could lead to problems in the future.

For example, if your secured card is your only credit account and the card issuer reports to Equifax, you might be able to build a long credit history with Equifax. You could even get good credit scores based on your Equifax credit history. However, if you apply for a new loan or credit card and the lender tries to pull your Experian or TransUnion credit report, it might not approve you because you won't have any Experian or TransUnion credit reports.

A long payment history with on-time payments can be important for building credit and improving your credit. On the other hand, if you have late payments or stop making payments and your account goes into default or get sent to collections, that could hurt your credit.

Even if you never take out a loan or open a credit card, your credit can be important to your financial and personal life.

In most states, your credit history can impact your insurance rates and having poor credit can lead to paying higher auto and homeowners insurance premiums. Additionally, your credit may be a factor when you're applying for a job, want to rent a home, are setting up a new account with a utility or cell phone provider.

You might have trouble getting certain types of jobs if you have a bad credit history. It can also be hard to get approved for a rental home, or you may have to pay a larger down payment even if you are approved. Additionally, you could have to pay a security deposit before you can turn on utilities, internet, or television service for your home.

How to get a secured credit card and what it means

Banks, credit unions, and credit card issuers all offer secured credit cards and it's usually a three-step process:

  1. Apply for the card

  2. Send your security deposit

  3. Receive your card

Compare the options and cards' details before applying. Some secured credit cards are not good ideas as they're loaded with fees, have a low maximum credit line, and few benefits. Best to avoid those options, as there are secured cards that don't have an annual fee and offer much more reasonable features and fees. A few secured credit cards are even part of rewards programs, such as a cash-back program that allows you to earn cash back when you use your card for purchases.

You can apply for a secured credit card online or at a bank or credit union branch. Although it's easier to get approved for a secured credit card vs. an unsecured card, approval isn't guaranteed.

For example, Capital One lists a few situations when it will automatically deny an application, such as if an applicant's income isn't at least $425 higher than their monthly rent or mortgage payment. Additionally, some secured card issuers will require you have a bank account that you can use to send the security deposit.

Once you're approved, you'll need to transfer the security deposit to the credit card company. Often, you must do this with a bank transfer from a checking or savings account or using a debit card. The card issuer might automatically initiate the transfer if you're approved and have already shared your bank information. 

Some credit card companies also accept money orders or wire transfers, which may be your only option if you don’t have a bank account. The issuer will open your card account and send you your card once it receives the full security deposit.

How to use a secured credit card to help build credit

Secured credit cards work just like any other credit card. Your card will be part of a credit card network (Visa, Mastercard, Discover, or American Express) and merchants that accept cards from that network will accept your card as well. You can use your card online, connect it to mobile apps, and use it in stores. Many secured cards don't say "secured" on them, and merchants won't even know that it's a secured card unless they happen to be familiar with a particular card's design.

As with unsecured cards, most secured cards have a statement period followed by a grace period. Your card's balance increases as you use your card to make purchases during the statement period. At the end of the statement period, your card issuer will send you a bill for the charges and any applicable interest or fees. You then have around 21 to 25 days (depend on your card's terms) to pay the bill.

If your card has a grace period and you paid your bill in full during the previous month, interest doesn't accrue on your purchases during the statement period or the grace period. If you didn't pay your bill in full, the balance you carry and additional purchases you make will accrue interest every day. You'll also lose the grace period until you pay a bill in full.

Secured cards tend to have a high interest rate, and it's best to plan ahead and only make purchases with the card that you can afford to pay in full. Also, a high balance on revolving credit accounts (such as a credit card or line of credit) can hurt your credit scores and isn't a great way to help your credit. This is true even if you pay your bill in full each month because your balance generally gets reported to the credit bureaus at the end of your statement period. 

If you want to improve your credit scores, try to only use a small portion of your available credit limit (in credit scoring terms, this is known as having a low utilization rate). For example, if your card's limit is $100, use the card for a $10 subscription or to buy lunch one day each month and then pay your bill in full. While your secured card won't get much day-to-day use, the small charge and on-time payment can help you build a positive credit history while keeping a low utilization rate.

Choosing between a secured credit card vs. unsecured card

Given the option, an unsecured credit card may be best because you won't have to put up the security deposit. Additionally, there are more unsecured cards to choose from, including a variety of rewards credit cards, balance transfer credit cards, and cards that don't have an annual fee. However, it can be difficult to qualify for an unsecured credit card if you don't have a good credit score or have no credit history.

Often, a secured credit card is a stepping stone to qualifying for an unsecured card. You open the secured card as a way to build a positive credit history and then get an unsecured credit card once you can qualify for one. Some credit card issuers may "upgrade" your secured card to an unsecured card and give you your security deposit back, but it's generally not a good idea to go with a credit card that requires a security deposit. But generally, you'll need to apply for a new unsecured card on your own and decide whether you want to keep the secured card open or close it.

People who don't have credit, or have bad credit, can also use a debit card or prepaid card. These can be good alternatives to cash and can be used while shopping online. However, debit and prepaid card activity don't get reported to the credit bureaus and won't help you build credit.

Now that you know what a secured credit card is, which secured credit card is the best?

If you're new to the U.S. and are looking for a secured card to build credit, compare your card offers and look for the following features before submitting a credit card application:

  • No annual fee

  • Reports your account activity to all three major credit bureaus (many major issuers do)

  • Has a grace period (many cards do)

  • (Optional) it’s a rewards card that offers cash back

  • (Optional) you fund your credit card account without a bank account

We're creating a separate guide to the best secured credit cards with a breakdown of pros and cons for specific cards. There's also a guide to credit cards for U.S newcomers as well as a guide to credit cards for international students, which includes a mix of secured cards and credit cards created specifically for people coming to the U.S. to study or work.

How to transfer your credit score

Nova Credit's Credit Passport® helps people bring their credit history with them when they move to the U.S. While your credit history won’t be transferred to national bureau databases, creditors and lenders can use your Credit Passport to evaluate your application for a loan, apartment, and other services. Nova Credit currently connects to international credit bureaus in Australia, Brazil, Canada, India, Mexico, Nigeria, South Korea, the UK and many other countries.

Use your foreign credit history to start your U.S credit history

New to the U.S.? Check if you can use your country's credit history in the U.S. to apply for credit cards and start your U.S credit history using Nova Credit.

More from Nova Credit:

Credit Cards for No Credit

Credit Cards for International Students

Credit Cards Without SSN

Credit Cards to Build Credit

How to Build Credit

How to use your international credit report to get credit in the U.S.

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