How Does a Secured Credit Card Work?

You can use a secured credit card just as you would an unsecured card.
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Credit card issuers take a risk when issuing unsecured credit cards. If you max out your credit line, can't pay the balance and declare bankruptcy, the bank has to cover that amount. Because of that, people with low credit scores or a limited credit history may be unable to win approval for a traditional credit card. In those cases, a secured card lowers the bank's risk and gives you a chance to build your credit history.

Deposit Required

A secured card requires you to put up the funds for your credit line. This serves as collateral to make sure you honor your agreement and pay your bill. Usually your credit line will be all or most of your security deposit. Because of this security, even customers with a poor credit score generally are approved for secured cards. This amount is refundable – you generally can cancel the card and get your money back at any time. Often a secured card can be converted to an unsecured card after a set number of consecutive on-time payments.

Paying for Purchases

At the point of sale, a secured card works exactly like an unsecured card. You swipe it at a merchant location or type the number into the form for an e-commerce site, and the transaction goes through if you have enough money remaining on your credit line. There isn't any indication on the card itself that it's secured. Any hotel, airline or car rental facility that accepts Visa cards, for example, will accept your secured Visa card.

Monthly Bills

Payments on a secured card also work like an unsecured card does, even though you've already funded the credit line. You get a bill every month, either in the mail or electronically, and pay the balance. If you can pay only the minimum, you'll then accrue interest on the remaining amount. The difference comes if you fall too far behind on your payments. If that's the case, the issuer takes the money from the security deposit. Usually, this occurs only when the account is severely delinquent -- often 150 days or more.

Reporting Activity

For the secured card to serve its designated purpose, the issuer has to treat it the same way as an unsecured card and report your activity to the three major credit reporting bureaus. As long as it does so, and as long as you pay your bills on time, it will appear as any other revolving credit account and help you build a stronger credit score. Not every issuer reports on secured card activity, however, so check that yours does so before putting up the deposit.