What Is a Secured Credit Card and How Does it Work?

a couple applying for a secured credit card through online banking

Are you looking to establish or rebuild your credit? Secured credit cards might be the right solution. Considered the best credit cards for building credit, these cards offer a pathway to improving your financial standing. But what are secured credit cards and how do they work exactly?

Let's explore the ins and outs of secured credit cards and how they can help you pave the way towards a healthier financial future.

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What is a secured credit card?

A secured credit card is similar to a standard, unsecured credit card but with some differences. Secured credit cards are backed by a cash deposit from the cardholder, which serves as collateral on the account.

The deposit provides the lender, like a bank or credit union, with the ability to recover the funds if the cardholder fails to make payments. In other words, the deposit provides financial institutions with more protection and less risk. When you have a secured credit card, the amount you deposit, or use to "secure" the account, determines your credit limit. For instance, a $400 deposit will result in a $400 credit limit.

Secured credit cards, often called “credit builder cards,” are tailored for individuals with little or damaged credit. This offers a way to boost their credit scores or kickstart a credit history. It can be a practical choice for those aiming to improve their financial position and access credit options.

What’s the point of secured credit cards?

Let’s discuss the rationale behind secured credit cards. Similar to other loan products, credit card issuers rely on past credit history to gauge eligibility and set interest rates. Credit history is built through paying your bills on time, having multiple lines of credit, and more. A strong credit score typically translates to better offers from lenders because it indicates a lower risk of missed payments.

However, individuals with no credit history or less-than-ideal credit may face challenges in obtaining approval for a credit card. This is where secured cards come into play. Lenders are more inclined to approve applicants for a secured credit card due to the lower associated risks. That’s because the initial deposit acts as a form of insurance for the lender in case the cardholder fails to make timely payments.

How does a secured credit card work?

You can apply for a secured credit card the same way that you would apply for any other card, typically through a bank or credit union. Each financial institution may offer cards from different payment networks, such as Visa and Mastercard. 

As mentioned, when getting a secured credit card, the cash deposit you provide determines your credit limit, representing the maximum amount you can charge on the card. Credit limits for these cards vary, typically ranging from a few hundred dollars to several thousand, depending on card rules and how much money you are able to set aside.

Since the deposit serves as collateral for opening the secured credit card account, it is kept in reserve and remains inaccessible to the borrower after its submission.

With the card in hand, you can use it in the same way as any other credit card, making purchases and payments. As you begin using your secured credit card responsibly, you'll pave the way to improving your credit score. “Responsible” credit behavior means regularly paying your balance on time and managing your credit wisely, which will ultimately help you build a positive credit history over time.

Secured credit cards often serve as a stepping stone to obtaining an unsecured credit card. As your credit improves, you may become eligible to upgrade to an unsecured card. If you decide to make the switch or choose to close your account while it is in good standing, you may receive your deposit back, provided your balance is fully paid off.

How can I build credit fast?

The best secured cards or credit builder accounts will report your payments to major credit reporting agencies. This ensures that your trustworthy financial behavior is recognized across the board. Luckily, Academy Bank offers a secured credit card that does just that.

The Credit Builder Secured Visa® Credit Card comes with automatic reporting to all three major credit bureaus (Equifax, TransUnion, and Experian). That means your credit building efforts can be acknowledged and rewarded!

Highlights of “Credit Builder” from Academy Bank:

  • Set your own credit limit, ranging from $300 to $3,000
  • Say goodbye to annual fees, application fees, and over-limit fees
  • Added security with EMV chip technology
  • Faster, more secure online transactions when you enroll in Visa® Secure Remote Commerce
  • Automatic reporting to the three major credit bureaus

Moreover, Academy Bank provides useful credit tools, offering advice on best credit practices and financial calculators to help you assess and manage your credit effectively.

Start building credit and apply for a secured credit card today!

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Subject to credit approval. Transaction and Penalty fees apply.  Credit Builder Savings account required. $5.00 quarterly fee charged to the Credit Builder Savings account if not enrolled in eStatements. Improved credit score is not guaranteed. Credit score is determined by credit reporting agencies based on multiple factors, but satisfactory performance on a credit card product can improve your credit score. Default on a credit card, including missed or late payments can damage your credit score. Once added, funds cannot be withdrawn from the Credit Builder Savings account and the Credit Builder credit card without closing the savings account and the credit card.