Secured Credit Card

A secured credit card is a type of credit card that is backed by a secured payment used as collateral on the account. Secured credit cards are often issued to subprime borrowers or those with limited credit histories (so-called thin file borrowers). With standard reporting to credit reporting agencies, these cards can help borrowers improve their credit profile.

Secured credit cards are issued by nearly all of the leading credit card lenders. These cards require a standard credit application, which assesses a borrower’s credit score and credit history through a hard inquiry with a credit reporting agency. Underwriting and credit approval procedures then determine the amount of funds needed by the borrower to open an account, and the credit line that will be extended. Deposits typically start at $200, but can range as high as $1,000, with a credit limit usually set at the amount of the deposit. 

A secured credit card functions in the same way as a standard credit card. Borrowers can use the card anywhere the card brand is accepted. Borrowers can make purchases up to the card’s maximum credit limit. Borrowers pay interest on outstanding balances, which is detailed in the credit agreement. Cardholders also receive monthly statements showing their end-of-period balances and the activity on the card during the specified month.

The deposit made to open the secured credit card account serves as collateral and is generally only used if the cardholder defaults. The collateral makes a secured card different from standard cards. It is required to open the account and is not accessible to the borrower once it has been paid.   (If you pay off and close a secured credit card or it is upgraded to a non-secured card, the deposit is refunded.) Secured-card holders are responsible for making monthly payments on the credit card, which are requested from the borrower through the usual monthly statement.

While consumers typically obtain secured credit cards to improve their credit, their credit score can be damaged if any delinquencies arise. Usually secured card lenders will use the card’s deposit as reserve collateral only if you default. But if you miss payments, lenders will report delinquencies. If positive payment history occurs on the card, secured card lenders may increase a borrower’s credit limit over time.

In the credit card industry the Discover it Secured Card is one of the most popular secured cards. It generally approves borrowers in the fair credit category. It also accepts borrowers with minimal credit history. The card’s maximum initial limit is $200, requiring a deposit of up to $200 to open the account. At eight months, the card is reviewed for an unsecured card transfer, at which time the borrower’s deposit can be refunded.

The Discover it Secured Card offers numerous cash back rewards and has no annual fee. It has a variable annual percentage rate (APR) of 24.74%, and until November 10, 2018, is offering an introductory balance transfer APR of 10.99% for six months from the date of the first transfer.