How Does a Secured Credit Card Work?

Posted by Excite Credit Union on Feb 25, 2022 11:00:00 AM

a young woman makes a purchase online after learning how a secured credit card works

A secured credit card gives you a credit limit based on the funds in your savings account. Your savings work as collateral for the purchases you make on your card. 

If you're at the start of your financial journey, or you need to repair bad credit, a secured credit card is the perfect financial tool. Just make regular, timely payments and your credit will soon begin to improve. Read on for full details about how a secured credit card works!   

What Is a Secured Credit Card?

A secured credit card means the credit card issuer keeps aside some of your savings funds as a guarantee that you'll make all your payments. You can get a secured credit card from your local credit union or another financial institution. 

Here's how a secured credit card works:

  • You save up at least $500 in your Share Savings Account
  • You apply for a secured credit card and provide your savings as collateral.
  • The credit limit on your secured credit card may match the amount in your savings account.
  • While you use a secured credit card, you can't access your savings.
  • You use your secured credit card to make purchases and you pay at least the minimum amount due each month.
  • Your credit score starts to improve and then you may qualify for an unsecured credit card.
  • Your credit card issuer releases your savings back to you.

Benefits of a Secured Credit Card

A secured credit card is your chance to prove you're a responsible borrower. You may qualify for a secured credit card even with no credit history or poor credit. Here are a few great features to keep in mind if you're still wondering, how does a secured credit card work? 

Affordable Credit Limit 

You'll never need to worry about spending more than you can afford because your limit is automatically checked by how much money you have in your savings account.

Protect Your Savings

While you use your card, you can't use your savings – and this means you can't be tempted to spend your rainy day fund. Instead, your money will keep growing and be waiting for you once you're ready for the next financial step.

Build Credit

It takes time to make great financial history so you can't expect miracles overnight. But a secured credit card can give you a kickstart. Make on-time payments each month and you'll soon start moving in the right direction!

Repair Credit

Your credit score drops if you miss a few credit card or loan payments – then it can be hard to turn things around. Some lenders will deny you a credit card or loan. Luckily, a secured credit card is like an olive branch that gives you the tools to start over and restore your credit.

Gateway to Other Financial Products

A credit card is just the beginning. Once you've proved you can borrow and pay back funds every month, you'll be able to get a personal loan or an auto loan – and eventually a mortgage to buy your dream home. 

Who Is a Secured Credit Card Good For? 

Everyone deserves the chance to start out right in life – or to turn things around if you've made a few mistakes. A secured credit card is designed to serve people who need a helping hand.

A secured credit card is good for these people: 

  • Students. If you've just graduated high school, you might be thinking about leaving home for college. A credit card means you'll always have a financial safety net while your savings will stay safe, too.
  • People with no credit. Maybe you've always paid by cash or check. A secured credit card can get you on the map and open doors to other financial services and offers.
  • People with poor credit. If you've made a few mistakes in the past and your credit isn't in great shape, a secured credit card can get you back on track. Just save up $500 and you'll be able to begin a brighter financial future.
  • People who need a credit card for a specific purpose or purchase. There are times when only a credit card will do. A secured credit card might be your only way to make certain reservations and bookings or to shop from certain stores. 

Comparing How Different Credit Cards Work

Now that you know how a secured credit card works, you might have decided it's definitely what you want – or you might still be looking for the right option. 

Every credit card comes with a unique selling point to appeal to different people. For example, a credit card might feature a lower interest rate or a higher limit. It might offer rewards or free balance transfers. Click below to find the right card for you!



Topics: Credit Cards