What is a Secured Credit Card and How Does it Work
Have you wondered what a secured credit card is? What about the difference between a secured and a "regular" credit card? Could you get approved for a secured credit card if you've been denied for an unsecured credit card? Read on to learn the difference and how a secured credit card can help you build or repair your credit.
What is a Secured Credit Card
A secured credit card is a credit card with a cash deposit as collateral. Think of it like your security deposit when renting a space, which you can get back after you upgrade to an unsecured credit card or close the account. Your deposit will cover any fees or the balance owed on your card at the time of closing, if applicable. If you're unable to make payments, the money in your deposit is used to pay for the balance. Usually, the security deposit is the same or slightly lower than the credit limit you're approved for. Generally, you have the option to ask for a lower credit limit if you prefer. Other than that, a secured credit card works the same way a regular credit card does, and no one but you and the credit card issuer will know that it's a secured card.
How Does a Secured Credit Card Work
A secured credit card requires a security deposit, so if you cannot pay the balance on your card for whatever reason, it can be paid with your deposit. The credit limit is usually equal to or a bit less than your security deposit. Secured credit cards also generally have higher interest rates or fees but work just like regular credit cards. The goal is to build healthy financial habits like making on-time payments and having a low balance on your card since your balance and payment history are reported to the major credit bureaus and can help to build or rebuild your score.
After you build a positive payment history with the credit card provider and don't overspend or keep it maxed out, you'll be much more likely to get approved for an unsecured credit card and get your security deposit back.
Is a Secured Credit Card the Same as a Prepaid Card
In short, a secured credit card is not the same as a prepaid card. There are a few different types of cards, all of which work differently.
| Secured Credit Card | Unsecured Credit Card | Prepaid Card | |
|---|---|---|---|
| Builds Credit | |||
| Charges Interest | |||
| Rewards | Potentially | Usually | |
| Application Needed | |||
| Deposit Needed | (works like a gift card) | ||
| Credit Limit | Up to your approved amount with security deposit | Up to your approved amount |
Is it Better to Get a Secured or Unsecured Credit Card
While an unsecured or "regular" credit card has some perks over a secured card, like lower interest rates and higher credit limits, they both work the same. You buy using your card and pay it back to help build your credit score. However, for those who have trouble getting approved for an unsecured credit card for whatever reason, a secured card can be a great way to practice healthy habits like making on-time payments to help build their credit score. After some time, you can apply for an unsecured credit card and get your security deposit back.
Potential benefits of secured credit cards include:
- Getting experience using a credit card
- Access to funds when you need it
- Build your credit with responsible use (on-time payments)
- Work toward qualifying for an unsecured credit card and getting your security deposit back
Does a Secured Credit Card Build Credit Fast
Building credit takes time, and how quickly your score goes up will vary a bit from person to person because there are multiple factors that affect your credit score. In general, you should see changes to your credit score in three to six months as you build a positive payment history.
How to Choose a Secured Credit Card
Look for cards with no annual fees, reasonable security deposit requirements, and a low interest rate. Some secured cards offer rewards or cashback, which is a nice perk as you build your credit. Other than those points, double-check that they report the payment history of their secured credit card to at least one of the three major credit bureaus so your card can help build your credit. Ask your bank to see if they offer a secured credit card since you already have accounts there.
WaFd Bank is Here to Help
No question is too small for our friendly bankers, and with WaFd, you also have access to tools and services to help you manage your finances and get the most from your money. To apply for a secured credit card, visit us at your neighborhood branch, give us a call at 800-324-9375, or find more information on our secured credit card to see if it's right for you.
Terms and conditions apply, subject to credit approval.
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