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What is a secured credit card?
A secured credit card requires a refundable deposit upfront from the card applicant. If the credit limit is $500, typically the credit card limit will be the same, $500.
Credit Card with Security Deposit
It may seem counterintuitive, that a credit card would require a deposit. Isn’t this just a prepaid card or a debit card? The reason for holding a secured credit card is to build up your credit score. The activity on your secured credit card is reported to the credit card bureaus whereas prepaid and debit card activity is not reported. The exception to this is, when the debit card is being used in conjunction with an overdraft facility. This activity would be reported as the overdraft facility is a form of credit. It should also be noted that credit cards lend money to the cardholder, the card creates a short-term loan. The prepaid card and debit cards contain money in their accounts, and the money is deducted immediately, there is no loan facility.
If you’re young and have no credit history, you can use secured credit card to help build your credit history. It can also be used by people who have been through difficult times financially and need to repair their credit score over time by exhibiting good credit behavior.
The reason the card provider requires a deposit is because the applicant represents a greater risk in terms of credit card default as their credit history is unproven. The deposit allows the card issuer to take the secured funds should the card holder exceed their limit or default on payments. This is why; the card limit is usually equal to the deposit as it lessens the risk to the lender. This is common practice in lending; for example, mortgage providers in the United States very rarely give 100% mortgages but will ask for a deposit in the region of 20%. As with secured credit cards, the mortgage providers are looking to mitigate their risk by requesting a security deposit. That way if the borrower defaults, the lender can use the deposit to amend the shortfall.
Secured credit cards will normally also charge an annual fee of around $0 to $50. However, as always, there are exceptions such as ‘Capital One’ and ‘Discover it® Secured’ offering $0 annual fees as of February 2026.
Credit Score
The purpose of a secured credit card is to build or rebuild your credit score. Once you have displayed good credit behavior over the course of 6 to 18 months, you can begin to apply for unsecured credit cards which will allow you to close your secured credit card account and have your deposit returned.
In order to make the most of a secured credit card, or any card for that matter, best practice would suggest that you never exceed your credit limit. You should always pay the minimum amount requested, although preferably pay the statement balance in full every month. You should also be aware of the Credit Utilization metric that lenders use to monitor how much of the credit limit you are using. In terms of building your credit score, it would be advisable to keep your spending below 30% of your credit limit. If your credit limit is $500 then use no more than $150.
You should also note that you cannot use your deposit to pay your balance. The deposit is kept by the card issuer for their protection and if you fail to make a repayment, there is a strong possibility that your card account will closed down with a negative mark recorded on your credit file
If you wish to keep track of your credit score, the three main credit reference agencies are ‘Equifax’, ‘Experian’, and ‘TransUnion’.
