What is a secured credit card? Your tool to build credit

Whether you're trying to rebuild your bad credit or wanting to open your first credit account, a secured credit card can help. As long as you use it correctly, that is! This article explores everything you need to know about secured credit cards—how the deposit works, pros and cons, how to apply, secured card alternatives, and more.

What is a Secured Credit Card?  

A secured credit card is a special type of credit card that can be a useful tool for building credit. Typically, when you use a secured credit card, you pay a cash deposit up front as a guarantee. If you miss your payment, the car issuer may keep the deposit. Generally, the amount of the deposit is your credit limit. In plain terms, you add a balance to the secured credit card, and that's how much you can spend using the card. For example, if you deposit $500 into your secured credit card account, you'll have a $500 spending limit on the card.

This type of card can be helpful for those with limited credit history, or bad credit, and may be an excellent choice if you're trying to build, rebuild, or establish credit from scratch.

This means that unlike a traditional credit card, your credit line is being backed with funds that you’ve already deposited into the account. The money is then used as security in case you were to default on your payments in the future (hence the term “secured” credit card).  Depending on the card, there may also be fees, interest rates, and required security deposits involved.

Secured vs Prepaid vs Debit Cards

The various card options out there can be a little confusing, so how does a secured credit card compare to other types of cards, like prepaid and debit cards (both of which use existing funds rather than a line of debt?)

Secured cards are different from prepaid and debit cards in a few ways:

Secured credit card

• It is a form of credit.

• A cash deposit sets and acts as backing for the credit line.

• Activity is reported to the credit bureaus and impacts your credit score.

Prepaid card

• Not credit; issuers do not report to credit bureaus.

• Funded by your own preloaded funds.

Debit card

• Activity not usually reported to credit bureaus.

• Connected to a checking account balance.

Secured credit cards typically require a deposit ranging from $200 to $2,500 to determine the credit limit (though Varo’s Believe Credit Builder Card1 does not have a minimum requirement). This type of card can be helpful for those who have a limited credit history, as it provides them with a credit line to begin building a credit history with everyday spending—unlike prepaid and debit cards.

What is an Unsecured Credit Card?

If the above options are all “secured” by a deposit, then what is an “unsecured” credit card?

Simply put, an unsecured credit card is a typical credit card. This type of credit card doesn't require you to provide any collateral against the balance you're given. Instead, the lender will grant you a balance based on factors like your credit score, account history, time of employment, and other relevant information. 

When you sign up for an unsecured credit card, you'll agree to a contract specifying your credit limit, minimum payments, interest rate, and due date. You’ll then need to pay your balance before the due date each month to avoid interest charges and possible late fees.

How Exactly Does a Secured Credit Card Work?

To obtain and use a secured credit card, you need to follow a few important steps:

1. Applying for the Secured Credit Card 

The card issuer will likely perform a credit inquiry to view your reports and credit history. This helps set deposit amount limits and terms. The issuer sets the cash deposit amount required to open the account based on your creditworthiness. This is often at least $200.

Note: When applying for a Believe Credit Builder Card, Varo will not conduct a credit check and there will be no minimum funding requirement. Once approved, you’ll still get the benefits of a secured credit card without all of the hassle!

2. Getting Approved  

Approval for secured credit cards may be more lenient than for unsecured cards since your deposit covers much of the risk for the issuer, but you must still meet eligibility standards.  

3. Making the Security Deposit

Many issuers require paying the deposit in full upfront to fund your credit line, but some allow depositing over several months. Your credit limit is equal to your deposit amount in most cases. Be aware that some secured credit cards come with fees and interest.

4. Using the Card

Once approved and funded, you can use your secured credit card to make purchases in stores or online. It’s important to manage it responsibly like any credit card account, making at least the minimum monthly payments (although paying in full is preferred). As you use your secured credit card, the issuer reports your activity to the three major credit bureaus—Equifax, Experian, and TransUnion.

Pros of Secured Credit Cards

Secured credit cards offer a range of benefits, including the following:

• Establish a credit history: If you're new to credit and have no prior accounts, a secured card can help you build your credit file.

• Rebuild damaged credit scores: For those with low scores due to past issues, responsible use of a secured card can demonstrate improved financial habits. See our article about Why Your Credit Score Dropped.

• Better future opportunities: Demonstrating reliability to creditors can often lead to greater opportunities for obtaining loans with better terms or unsecured card offers in the future. 

• Refundable deposit: The money you initially deposit usually serves as temporary collateral and is returned when you close the account with a zero balance.

• Bonus perk of Varo’s Believe Credit Building card: With SafePay2, Varo automatically pays your balance before each due date using the money previously added to your Believe Secured account. No more late payments!

If you have a limited credit history or have made financial mistakes, opening a secured card can be a stress-free way to demonstrate your creditworthiness to lenders going forward. Just make sure to keep making timely payments to build a positive credit history!

Cons of Secured Credit Cards

It’s important to note that some drawbacks come with secured cards. For example:  

• High Annual Percentage Rates (APRs) and fees: Interest rates often exceed 20.00% for secured cards—higher than unsecured alternatives—and annual or monthly fees can apply.   

  • Varo does not charge interest or monthly/annual fees on our Believe secured card.

• Low starting credit limits: Since your initial limit depends on your upfront deposit—possibly as low as $200—you could have limited purchasing power.   

  • Varo’s Believe card has no required initial limit! Fund and spend as much as you’re able to fund up front.

• Impacts credit utilization: High credit utilization can negatively impact your credit score, and secured credit cards with lower spending limits may make it difficult to stay below 30% credit utilization. This means you might need to make frequent payments throughout the month to manage your balance in order to benefit. 

• Need cash for deposit: Most often, you need to have money available to fund the deposit and credit line, which may pose a challenge for some. However, this can also help you to never spend beyond your means!

While rebuilding credit with a secured card, stay diligent and take responsibility! Secured cards may have initial limits and costs that seem restrictive compared to some unsecured cards. Check terms closely and budget wisely as you improve your financial standing.

Should You Get a Secured Card?  

Before applying for a secured card, carefully considering the pros and cons is crucial. Ask yourself the following questions:

• Do I need to establish a credit history and have no prior accounts?

• Do I need help getting approved for loans or rental applications due to my low credit score?

• Am I willing to fund the deposit (and with some cards, accept higher costs) while rebuilding my credit?

• Am I prepared to consistently pay my bill on time and keep my spending below 30% of my credit limit each month?

If you answered mostly yes to these questions, then a secured card might be a good option for you. However, it is important to be strategic by setting realistic limits.

Alternatives to Secured Cards   

If you feel that a secured credit card is not the right option for you, there are other ways to establish your creditworthiness. Some of the alternatives to secured credit cards are:

• Secured loans, which you put up collateral such as cash or investments.

• Credit builder loans, which you pay back monthly to the reporting agencies.

• Becoming an authorized user on someone else's credit card account.

However, secured credit cards may be the most accessible option for people who cannot pursue these other routes. They can provide an opportunity to build your credit history and establish good money management habits.

Varo Bank's Secured Credit Card

If you need to establish or rebuild your credit, Varo gives you the confidence to get going. Meet Varo Believe1, our secured Visa® credit card with no annual/monthly fee, no credit check, no interest, and no minimum security deposit. On average, customers using the Believe card see a 40+ point increase in their credit score after 3 months of on-time payments3.

Get started today or click to learn more about the Varo Believe Credit-Builder Card!

1 Varo Believe is a secured credit card designed to help you build credit; however, a variety of factors impact your credit and not all factors are equally weighted. Building credit may take time and Varo Believe may be able to help when you consistently make on-time payments.

The Varo Visa® Believe Card is issued by Varo Bank, N.A. pursuant to a license from Visa U.S.A.Inc.

2 By enrolling in Safe Pay, you authorize Varo Bank to auto pay your Varo Believe Card balance in full at the end of your billing cycle from funds in your Varo Believe Secured Account, before your actual due date. If the amount owed is more then your Secured Account balance your payment will not be made. You will have twenty-one (21) days to deposit additional funds to make your payment on time.

3 Customers who had an existing VantageScore® 3.0 credit score showed an average VantageScore® 3.0 score increase of approximately 40 points after three months of having Varo Believe and no late payments on their credit. Individual results may vary, and some customers may not see a score increase. As of July 3, 2024.