How Does a Secured Credit Card Work?

If you have credit problems or no credit, a secured credit card from Navy Federal Credit Union can help. Here’s how.

By Navy Federal July 15, 2020
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If you have limited experience with credit or had credit problems in the past, you may think you’re out of luck when it comes to obtaining a credit card. However, there’s a solution: a secured credit card. How does a secured credit card work—and how can you get one? Let's find out.

What’s a Secured Credit Card?

A secured credit card is just like a regular credit card, except that it uses your own money as collateral. In other words, you’ll deposit a certain amount when opening an account, and then that money will be returned to you when you close your account or switch to a non-secured card.

Most secured credit cards require a deposit of at least $200 to $500. This means if your initial deposit is $500, your secured credit card will have a credit limit of at least $500. If your initial deposit is more, your credit limit will be at least equal to that deposit.

The financial institution backing your secured card will place a hold on your deposit, meaning it won’t be available for spending or be able to go toward paying off your card balance—so you’ll still need to pay your bill every month. Paying off your secured credit card every month can help improve your credit score and help repair your credit history if you’re working on that.

What Are the Benefits of a Secured Credit Card?

If you have no credit or poor credit, a secured credit card enables you to build (or rebuild) your credit score. Simply use your card for everyday purchases anywhere credit cards are accepted, and then pay your monthly bill on time. Most financial institutions report the activity on your secured credit card to the major credit bureaus. It’s this reporting that allows you to build a strong credit history. Because this reporting is so important for building your credit history, make sure you open a secured credit card with an institution that takes this step.

Is a Prepaid Card the Same as a Secured Credit Card?

No, a secured credit card and a prepaid card aren’t the same. A prepaid card isn’t a credit card but rather a reloadable debit card. A prepaid card won’t help you build or improve your credit score like responsible use of a regular credit card or a secured credit card will.

How Does a Secured Credit Card Work?

Once you have a secured credit card, you can use it like any traditional credit card. Keep in mind that because a secured credit card is a way to improve and build stronger credit history, you’ll want to pay your monthly bill on or before the due date. Even though you made a deposit to open the card, you’re still required to make your monthly payments.

Then, once you've established a history of good credit (which can happen after as few as 6 months of on-time payments), you can upgrade your account, and the hold would be released on your deposit—provided your balance is fully paid and the account is in good standing. Alternatively, some secured card providers will give you the option to transfer to another non-secured card. This option has the benefit of increasing your average account age, which could help your credit score.

If you have Navy Federal’s nRewards® Secured credit card, after just 3 months, you could be eligible for an upgrade. If you qualify, we’ll provide you with additional credit to allow for spending beyond your deposit.

Then, at 6 months, we’ll review your account monthly to see if you’re eligible to have your hold removed and be upgraded to a cashRewards unsecured card.

How Does a Secured Credit Card Build Credit History?

The most important factors in building your credit score are your credit utilization and your payment history. Other factors include the length of credit history, types of credit used and new credit. By using a secured credit card on a regular basis and making your payments on time every month, you’ll establish credit history due to your payment history.

Another key factor in building credit is keeping your card balance low. Keeping your balance low will show creditors that you don’t need to rely strictly on your credit cards. A good credit score rule of thumb is to use less than 30% of your credit line each month to show you’re a responsible credit card holder.

What Should I Look for in a Secured Credit Card?

Not all secured credit cards offer the same benefits, fees and features. When looking into applying for a secured credit card, it’s important to look for a few signs in order to pick the best secured credit card for your financial situation.

  • Additional Fees: Some cards will charge annual, transaction or other additional fees. Check to see if the secured credit card charges additional fees that other secured credit cards may not have. You want to make sure that fees won’t outweigh the benefits of a secured card.
  • Credit Bureau Reporting: Not all secured credit cards report your card activity to the major credit bureaus. If you obtain a credit card like this, it won’t be helpful to building your credit. Make sure the secured credit card you apply for reports your activity to help you build your credit.
  • Rewards and Benefits: Not all secured credit cards offer the same features. Look for a card that offers features that appeal to you and your spending habits, such as the ability to earn rewards points or offering free FICO® Score access.
  • Reliable Source: Make sure you obtain a secured credit card through a reliable and reputable source with great customer service in case you ever need assistance.
  • Check With Your Credit Union: Credit unions tend to offer fewer fees and lower interest rates than banks, so check with your credit union before seeking a secured credit card through another lender. You’ll also want to ask about the process involved with eventually graduating from the secured card to a regular credit card.
  • How Can I Get a Secured Credit Card?

    The process for obtaining a secured credit card varies, so you'll want to contact your financial institution to ask about their process. To obtain a secured credit card through Navy Federal, the process is simple. First, open a qualifying Navy Federal savings account if you haven’t done so already. Then, make a deposit of at least $200 into your savings account. Finally, submit your application for a secured credit card. Once approved, you'll be issued a card with a credit limit equal to your deposit.

    More good news—with Navy Federal’s nRewards® Secured credit card, you’ll enjoy a low interest rate and no annual, balance transfer or foreign transaction fees. You’ll even earn interest on your initial security deposit. Plus, Navy Federal’s secured credit card goes the extra mile: for every dollar you spend using the card, you'll earn one rewards point that you can redeem later for cash back, gift cards or merchandise. Most importantly, Navy Federal reports all major activity to the credit bureaus, allowing you to build your credit history.

    How Do I Move From a Secured Credit Card to a Normal Credit Card?

    The main goal of using a secured credit card is to improve your credit score to a more comfortable level in order to then qualify for a normal, non-secured credit card. Once you achieve the credit score you desire and pay off the remaining balance, you can reach out to your financial institution to go over the next steps, including the chance to apply for a regular credit card.

FICO is a registered trademark of Fair Isaac Corporation in the United States and other countries.

This article is intended to provide general information and shouldn't be considered legal, tax or financial advice. It's always a good idea to consult a tax or financial advisor for specific information on how certain laws apply to your situation and about your individual financial situation.