What is a secured card and how does it work?

If you’re trying to rebuild or establish your credit, you’ve likely been told that a secured card is a great way to get started. For borrowers with limited or no credit, a secured card is a simple way to get a major credit card, and can often be obtained quite easily.

Secured credit cards are an excellent resource for borrowers with poor credit looking to improve their credit score or receive a line of credit. Concerning purchasing capabilities, secured cards work in the same manner as unsecured cards do. If your card is branded with MasterCard or Visa, it can be used anywhere that MasterCard or Visa is accepted.

In fact, the primary difference between secured and unsecured cards is that secured cards require a collateral deposit, rather than a credit check upon approval. This is because this type of credit is designed for people with credit scores of 600 or less or who may not qualify for unsecured credit.

Secured Credit CardsSecured Credit Cards

What is a Secured Credit Card?

A secured credit card or secured line of credit is backed by your own cash when you open the account. The deposit you choose to make is generally your credit limit. So, if you make a deposit of $300, your credit limit is also $300.

By securing the card with cash collateral, the credit card issuer’s risk is limited. If you miss a payment, the issue can merely reduce the money from your deposit. The reduced risk allows lenders to give credit capabilities to people with no credit and poor credit.

What happens to your deposit if you follow the terms of your agreement? According to your contract with your lender, you will eventually get your deposit back. If you use your secured card responsibly, your credit may improve enough to qualify for an unsecured card – one that does not require a deposit.

Some lenders may allow you to upgrade your secured account to an unsecured one. If your lender doesn’t have an upgrade path, you will need to apply separately for an unsecured credit card and close the secured one. When you close a current secured card, the bank will refund your collateral deposit.

The minimum and maximum amount you will need to open a card will vary by card issuer, but borrowers should be prepared to come up with between $200 and $300 for a deposit.

How Secured Credit Cards Work

Once you pay your initial deposit, secured cards work just like unsecured cards do:

  • You can use your secured card anywhere that credit cards are accepted.
  • You can rebuild or build your credit by paying your balance on time and using your card responsibly.
  • If you carry a balance, your secured card will incur interest.

Most major lenders and card issuers offer both unsecured and secured credit cards. If you can’t get approved for an unsecured credit card, a secured credit card is an excellent tool to improve your credit. Keep in mind, that a secured card is just as significant of a responsibility as any other bill or loan that shows up on your credit report. Your ability to manage your secured card will reflect on your credit report for years to come.

Unsecured Cards vs. Secured Cards

Whether or not you will need a secured card to build your credit will come down to how good your credit score is.

Unsecured cards don’t require a collateral deposit and therefore pose a higher risk to the card issuer. To be approved for a secured card, lenders will generally require a minimum of an average, good, or excellent credit history.

Some unsecured cards advertised specifically to those with no credit and poor credit. However, these credit cards often come with fees that are incredibly high. Experts recommend applying for a secured card and building your credit history, rather than an unsecured card that has high-fees.

Source: creditabsolute.com

4 Secured Credit Cards That Offer Rewards

[Update: Some offers mentioned below have expired and/or are no longer available on our site. You can view the current offers from our partners in our credit card marketplace. DISCLOSURE: Cards from our partners are mentioned below.]

Consumers with poor or nonexistent credit should consider secured credit cards for their spending and credit-building needs. Secured cards have looser credit restrictions and require a security deposit up front to open, but otherwise they operate like traditional credit cards.

With secured cards, your poor or limited credit history won’t necessarily keep you from earning rewards. While most secured credit cards are no-frills affairs, some do offer spending incentives.

Here are four secured credit cards with real rewards.

1. SKYPASS Visa Secured Card

Rewards: One mile for every dollar spent on eligible purchases.

Sign-Up Bonus: 5,000 SKYPASS bonus miles upon your first purchase.

Annual Fee: $50

APR:Variable 17.24% on purchases and balance transfers.

Why We Picked It: Cardholders can earn miles with select airlines.

Benefits: Every purchase earns one SKYPASS mile per dollar. You’ll get 5,000 bonus miles right out of the gate and 1,000 bonus miles every year upon renewal. Points can be redeemed for flights and upgrades with SkyTeam partners—including Delta, Korean Air, and Air France—or for other travel expenses.

Drawbacks: There’s a $50 annual fee, and miles are limited to twenty participating airlines.

2. Best Western Rewards Secured Mastercard

Rewards: Thirteen points for every dollar spent on Best Western stays; two points for every dollar spent on other purchases.

Sign-Up Bonus: 5,000 bonus points upon your first purchase.

Annual Fee: $29

APR:Variable 21.99% on purchases and balance transfers.

Why We Picked It: Frequent Best Western guests can earn points for future reservations and more.

Benefits: Cardholders earn thirteen points per dollar on Best Western stays, with ten points through the Best Western Rewards program and three points for using your card. All other purchases earn double points. Points can be redeemed for Best Western stays, gift cards, merchandise, and more.

Drawbacks: If you aren’t a loyal Best Western guest, this card isn’t for you. 

3. Navy Federal nRewards Secured Credit Card

Rewards: One point per dollar spent on all purchases.

Sign-Up Bonus: None

Annual Fee: $0

APR:Variable 9.99% to 18% on purchases and balance transfers.

Why We Picked It: Navy Federal members can earn points for goodies.

Benefits: All purchases earn one point. Points can be redeemed for gift cards or merchandise.

Drawbacks: You must be a Navy Federal member to access this card. Points expire after four years.

4. AeroMexico Visa Secured Card

Rewards: Two miles for every dollar spent on gas and groceries; one mile for every dollar spent on everything else.

Sign-Up Bonus: 5,000 bonus miles and a companion flight certificate with your first purchase.

Annual Fee: $0 the first year, then $25.

APR: Variable 23.99% on purchases and balance transfers.

Why We Picked It: Frequent AeroMexico flyers can enjoy the miles earned with this card.

Benefits: Gas and grocery purchases earn double miles, and all other purchase earn single miles. Your first purchase earns 5,000 bonus miles and a companion certificate. Plus, you’ll get an additional $99 companion certificate each year you renew.

Drawbacks: If you don’t fly AeroMexico, you won’t see much value in this card.

Choosing a Secured Credit Card with Rewards

Because secured credit cards are primarily intended for consumers with poor or nonexistent credit, building credit should be your primary goal. Rewards should be a secondary concern.

Pay close attention to the fees and APR associated with any cards you’re considering. Annual fees and interest can eat into the overall value of earned rewards.

You’ll also want to evaluate security deposit policies. Many secured credit cards can be opened with as little as $200, and the credit limit will equal your deposit. Some cards may increase your credit limit without requiring an additional deposit after a period of timely payments and responsible card use.

When it comes to rewards, choose a card that rewards your specific spending habits and provides redemption options you’ll actually use.

What Credit Is Required to Get a Secured Credit Card?

Secured credit cards are generally available to consumers with poor or nonexistent credit history, but that doesn’t mean approval is guaranteed. To increase your chances of approval, you should check your credit score before you apply to make sure you meet the requirements. You can check your credit report for free at Credit.com.

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At publishing time, the Discover it Secured Credit Card is offered through Credit.com product pages, and Credit.com is compensated if our users apply for and ultimately sign up for any of these cards. However, this relationship does not result in any preferential editorial treatment. This content is not provided by the card issuer(s). Any opinions expressed are those of Credit.com alone, and have not been reviewed, approved or otherwise endorsed by the issuer(s).

Note: It’s important to remember that interest rates, fees and terms for credit cards, loans and other financial products frequently change. As a result, rates, fees and terms for credit cards, loans and other financial products cited in these articles may have changed since the date of publication. Please be sure to verify current rates, fees and terms with credit card issuers, banks or other financial institutions directly.

Source: credit.com