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How Does a Secured Credit Card Work?

Written by Banks Editorial Team
6 min. read
Written by Banks Editorial Team
6 min. read

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Credit cards are useful financial products that increase your purchasing power, build your credit if you make on-time payments, and provide rewards for every purchase. It’s no wonder over 183 million Americans use credit cards for their purchases, but getting a card will hurt your credit score in the short term. A lower score hurts your chances of qualifying for a loan in the future, and it’s entirely possible that your credit card application will get rejected.A secured card is a more reliable path to credit for consumers with low credit. These financial products cater to consumers with less-than-perfect credit and work just like a traditional credit card. While a secured credit card is one solution, it is possible to get pre-approved for a line of credit without a credit check. We will discuss how secured credit cards can help with your finances.

Get a Digital Credit Card
Access a revolving line of credit based on your cash flow, not your credit score, with the Grain digital credit card.

What Is a Secured Credit Card?

A secured credit card is a debt product offered through many banks and credit card issuers, primarily for poor credit applicants or people with limited credit history. Secured credit cards are available to borrowers with varying credit backgrounds. You can use it to repair your credit by paying bills and covering the debt for everyday purchases before the due date. But unlike a traditional credit card, it requires a cash deposit upon approval before the credit card issuer will open your account. These cards also have more limits around them to keep your spending in control.

How Does a Secured Credit Card Work?

Secured cards provide an easier path to building credit and financing your purchases with a credit card. However, they aren’t as good as unsecured credit cards, and people with good credit would usually benefit from a traditional card. While both types of credit cards seem similar on the surface, their slight differences are important to keep in mind. Here’s what you need to know about secured credit cards and how they work. 

Card Application

The card application process is the same for secured and unsecured cards. You must be 18 years or older to apply for a card and provide personal details (i.e., name, address, social security number, etc.). However, the key difference is that you’ll also remit funds for the required security deposit before the card can be activated. While this may sound similar to a prepaid debit card, this card’s activity gets reported to the major credit bureaus, a key distinction that can improve your credit score if you make on-time payments. You will receive your card within a few days or weeks of paying the security deposit, depending on the issuer.

Refundable Security Deposit

The refundable security deposit is one of the key security credit card requirements that separates these financial products. While you do not have to fulfill a minimum deposit requirement for an unsecured credit card, it’s your only path to a secured credit card. Luckily, it’s possible to receive a full refund on your security deposit under the right conditions. In addition, once you’ve used the card responsibly for some time, you can convert it to an unsecured credit card to receive your money back.

Unsecured credit cards are superior to secured credit cards since they have rewards programs, lower fees, higher credit limits, and other advantages. You can find secured credit cards with rewards programs, but they are relatively rare, especially compared to unsecured cards. Many people open secured cards hoping to someday swap them in for unsecured credit cards in the future. Secured credit cards are a stepping stone. Some people use them to repair credit, while others use them to begin their credit-building journey.

You can also close the card if you no longer find it useful and want your money back. The credit card issuer will deduct the amount owed from the security deposit (if applicable) and return the remaining balance to you. It isn’t best to close a credit card since doing so will affect your credit history. Credit history makes up 15% of your score, and closing a credit card will make a dent in your credit history. However, if the fees are excessive, you already have strong credit, and a potential loan application is nowhere in sight, it may make sense to close the card if you no longer need it. Most people would benefit from keeping the card open and never using it again once they have a suitable replacement.

Spending Limit

Your security deposit is typically equal to your credit limit. If you apply for a secured credit card and get approved for a $500 limit, you’ll need to remit this amount to the credit card issuer before you can start using it. You will have to continue funding your secured credit card if you want to use it. This card is similar to a debit card since it relies on your funds instead of pulling you into credit card debt.

Deposit as Collateral

Secured credit card issuers can use your deposit as collateral if you have issues keeping up with payments. Struggling with credit card payments can result in the credit card issuer using your collateral to repay debt and closing your credit card account. This scenario would hurt your payment history and put your credit score in a bad position. Only take out a secured credit card if you can comfortably repay what you spend. 

Usage, Purchases, and Payments

You can use a secured card just like you would use a traditional credit card to make in-store or online purchases up to the credit limit. Each month, you will receive a credit card statement indicating the minimum monthly payment amount. Then, you can use money in your bank account to repay the balance early to avoid high-interest rates on your debt. 

It is a good idea to pay off the entire balance instead of stopping with the minimum payment. The minimum payment keeps you in good standing, but the remaining balance will grow because of the high-interest rate. It is also important to consider that your security deposit will not get used to cover purchases or the minimum monthly payment amount. You will have to use additional funds to repay your credit card balance.

Get a Digital Credit Card
Access a revolving line of credit based on your cash flow, not your credit score, with the Grain digital credit card.

How Does It Differ from an Unsecured Credit Card?

Unsecured credit cards do not require a security deposit. Consequently, they’re generally reserved for consumers with good or excellent credit scores. Financial responsibility will help with any credit card, but it’s more important to practice responsible use of unsecured cards. A higher limit and more spending power have their advantages, but if you plunge deep into credit card debt, it can become difficult to recover. Secured cards have safety brakes in place to minimize how much money you can lose.

If you are able to qualify for a regular credit card with a lower credit score, expect to pay steep fees. In addition, the cost of borrowing, or APR, will also likely be on the higher end. Credit card companies look at several factors when deciding on those rates, including your credit score. Therefore, you should review the terms and conditions of an unsecured card to understand the fees and APR involved. This analysis can help you avoid an unpleasant surprise.

What Are the Benefits of a Secured Credit Card?

Rebuild Credit

Secured credit cards make it easy to build credit if used responsibly. Your credit history, which accounts for 35% of your credit score, will improve if the credit card issuer reports payments to the three major credit bureaus – Experian, TransUnion, and Equifax. It’s equally important to keep your balance at or below 30% of the credit limit to boost your credit rating. Keeping your credit utilization ratio below 10% will provide maximum credit growth. A low credit utilization ratio implies a good payment history, and these two scoring categories make up a combined 65% of your credit score.


A secured credit card holder will receive their security deposit back (minus the amount they owe) upon closing their account. You can also receive this refundable deposit if you convert your type of credit card from secured to unsecured.


Secured credit cards have fees and interest rates. You can avoid interest payments by paying your balance in full before the due date. Paying on time will also improve your credit score and help you qualify for a better card in the future. You should only spend as much on your credit card as you can pay back on time. Buying more than you can afford will create financial complications, especially if you carry over those spending habits with an unsecured card.


A secured credit card can also help you manage your spending more effectively if used to cover recurring monthly expenses. Secured cards rely on your security deposit for the limit, so it’s easier to scale back on unnecessary spending. A lower ceiling gives you less room to expand your credit card debt and go into dangerous financial territory. 


Most credit card issuers let cardholders manage their accounts from an online dashboard or mobile app. The online banking experience makes it easier to repay debts on time and get a snapshot of your finances. 

Is There an Alternative to a Secured Credit Card?

A bad credit score doesn’t have to stop you from accessing affordable credit. Instead, consider a flexible solution, like the Grain app, that offers digital credit lines to consumers with varying financial backgrounds. You can get pre-approved for a revolving line of credit without hurting your score, something you can’t do with traditional financial institutions. Grain generates your offer centered around your cash flow, not your credit score. You can download the mobile app to learn more about what Grain has to offer or access all the features it has to offer.

Get a Digital Credit Card
Access a revolving line of credit based on your cash flow, not your credit score, with the Grain digital credit card.

Disclaimer: Credit offer based on cash flow in the linked checking account and may require a credit check. All accounts are subject to ID verification and approval. See your Credit Agreement and Terms of Service for further details.

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