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 January 11, 2018

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. Regardless of your credit history, 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, and How Does It Work?

Simply put, a secured credit card is a credit card that uses your own money as collateral. In other words, you'll deposit a certain amount at account opening, and then that money will be returned to you when you close your account or switch to a non-secured card. For example, most secured credit cards require a deposit of at least $300 to $500. This means that once you make an initial deposit of (for example) $500 into a qualifying account, your secured credit card will have a credit limit of at least $500. If you initially deposit more, the credit limit for your secured credit card will be at least equal to your deposit. There will be a hold on this deposit, meaning that it won't be available for spending or to pay off your card balance–so you'll still need to pay your bill every month.

Manage Your Spending

Once you've been issued 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 your credit history, you'll want to make sure you 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 six months of on-time payments), you can close your account, and your deposit will be returned to you–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.

What Are the Benefits of a Secured Credit Card?

The benefits of a secured credit card are numerous. 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 purchases and 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.

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. 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 deposit. Plus, Navy Federal's secured credit card goes the extra mile: for every dollar you spend using the card, you'll earn one reward point you can redeem for gift cards or merchandise. Most importantly, Navy Federal reports all major activity to the credit bureaus, allowing you to build your credit history.

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.