When should you consider a secured credit card?

A secured credit card can be a very handy financial tool—especially if you need help to build or strengthen your credit. Here’s what you need to know to decide whether it’s the right approach to credit for you.

What is a secured credit card?

A secured credit card uses money you place in a security deposit account as collateral. A security deposit gives lenders the confidence that you will pay them back, even if you have damaged credit or no credit history. That’s because if you fail to pay your bill, the lender can keep your deposit.

Your credit line is based on your income, your ability to pay, and in most cases, the amount of your security deposit. For example, if you put $1,000 into the deposit account, your available credit line would be $1,000 if you have sufficient income and can demonstrate your ability to pay.

A secured credit card is not the same thing as a prepaid card—in this case, your deposit acts as collateral and doesn’t count toward payments.

How does a secured credit card work?

  • A secured credit card looks and works just like a traditional credit card. That means you can use it for everyday purchases as well as for transactions where cash or debit cards may not be accepted—booking a hotel room in advance, for example. The card won’t say “secured,” so you can be confident when you use it that no one will know it is a secured card.
  • A secured credit card can help you establish or rebuild your credit. Making your monthly payments on time is just as crucial with a secured credit card as with a traditional card. Remember, if you default on your payments, the card issuer may keep your deposit.
  • Most secured cards are reviewed periodically. If the review is successful, you may qualify to move to an unsecured credit card and receive a refund of your collateral deposit. When handled properly, using a secured credit card to help establish or rebuild your credit can demonstrate to your credit card issuer and to the credit reporting agencies that you are a responsible consumer who used credit wisely. Eventually, responsible credit behavior could help you qualify for lower interest rates on mortgages, cars and other big-ticket items.

Think of your credit as another part of your life that could benefit from regular maintenance. Building yours and keeping it healthy may get easier the more you work on it.

If you’re searching for a card, Bank of America offers a secured credit card.

Close Disclaimer

The material provided on this website is for informational use only and is not intended for financial, tax or investment advice. Bank of America and/or its affiliates, and Khan Academy, assume no liability for any loss or damage resulting from one’s reliance on the material provided. Please also note that such material is not updated regularly and that some of the information may not therefore be current. Consult with your own financial professional and tax advisor when making decisions regarding your financial situation.

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