Secured credit cards: how they work and fees to watch

If you do not qualify for a regular credit card, a secured card is one of the most common ways to start. This guide is for anyone about to open one or who already has one: it explains how the deposit works, which fees to check in the application, what limits the law puts on those fees and how to move up to a regular card later. Everything comes from what the CFPB (the federal consumer financial protection agency) and Regulation Z, the federal credit card rule, publish.

Of the opening limit, the most in required fees during the first year

25%⁵

That your card should report to in order to build history

3 agencies²

At least, before the due date, your bill must reach you

21 days¹⁰

Of your limit, the most that experts cited by the CFPB advise using

30%¹³

What it is and how it works

A secured credit cardsecured credit cardA secured credit card is a card that helps you start or rebuild your credit history. To open one, you put a deposit in an account, usually equal to your credit limit, which starts out small. You can spend up to that amount and, when you pay the bill, that room becomes available again. Payments are reported to the credit reporting companies, so paying on time helps. As you show you pay on time, your limit may go up and your deposit may be refunded. Fees and interest rates can be high. A prepaid card is different and does not build credit.See the full definitionClose is a real credit card backed by a deposit. According to the CFPB, many banks and credit unionscredit unionA credit union is a not-for-profit financial institution that, like a bank, accepts deposits, makes loans and offers other services, but is owned by its members. Members elect a volunteer board of directors, and profits go back to them as lower fees, higher savings rates and lower loan rates. To join you need a common bond, such as your employer, your family, where you live or a group you belong to. It is chartered by the NCUA, a federal agency, or by a state. If the credit union is federally insured, your deposits are protected by the NCUA's insurance fund.See the full definitionClose offer them. You put an amount equal to your credit limit in an account as a deposit, and with most of these cards the credit line starts out small. As you show you can pay on time, your limit may be raised and your deposit may be refunded.¹

The CFPB explains it with an example: you put in an amount of cash, say $500, and you can spend up to that amount. When you pay the bill, your spending amount goes back up.² You apply for it like any card: once approved, you deposit the money in a separate account and the bank extends a credit line matching the deposit.³

Example with real numbers

How your deposit works

An example in words: the numbers change from issuer to issuer.

You put a deposit in an account

The amount you choose and the issuer accepts

Your credit limit

Usually equal to your deposit

Every month

You use little of the limit and pay the full balance

With on-time payments

Your limit may go up and your deposit may be refunded

The CFPB explains that the limit is usually equal to the deposit and that, with on-time payments, it may go up and your deposit may be refunded.¹ Plan your steps in the credit plan.

Run it with your numbersCredit plan

What sets it apart from a prepaid or debit card is that you borrow and pay later. With a prepaid card you only spend money you loaded beforehand, and it does not build history; with debit or cash you are not borrowing anything you have to repay later.²

Secured, prepaid or debit

Credit with a deposit

Secured card

• You borrow up to your limit and pay each month.²
• Its payments can be reported to the three agencies and create your history.²
• Its fees and interest can be high.¹

Your own money

Prepaid card

• You only spend what you loaded beforehand.²
• It does not help you build a credit history.²

No loan

Debit or cash

• You are not borrowing money you must repay later.²
• It does not help rebuild your credit.¹

If your goal is to build history, only the secured card of these three can help, and only if it reports your payments.³

Before you apply: what to ask

The CFPB suggests asking your bank, credit union or a local nonprofit credit counseling agency about cards and loans that help build credit.² It also describes another option, the credit builder loancredit-builder loanA credit-builder loan helps you create or improve your credit history and save at the same time. Some banks and credit unions offer them. Unlike a secured card, you do not make an opening deposit: the lender puts the loan amount in a locked savings account and you pay it off in small payments. Then you receive that money, minus any interest or fees. The lender reports your payments to the three nationwide credit reporting companies. In a CFPB study, these loans helped people with no other debts the most.See the full definitionClose, which you can compare with the card in Credit from zero.

Before you sign, ask these questions and get the answers in writing:

1. Do you report my payments to Equifax, Experian and TransUnion? You can generally build credit with a secured card, but the CFPB suggests asking the issuer about reporting to the credit reporting companies.³ When payments are reported, the three agencies create a report for you.²
2. What do I need to do to move up to a regular card, and when do you review my account? Many of these cards have a “graduation” feature after a pattern of consistent payments,³ but it is not automatic (we explain why below).
3. When and how do I get my deposit back? The CFPB says it may be refunded as you show you can pay on time;¹ the details are in your agreement.
4. Is the deposit charged to the card or paid separately? It changes how it counts toward the first-year fee cap.⁶

The issuer may ask about your income, to know whether you can make the minimum payment, and for your Social Security number, to get your credit report.¹¹ It usually sets your limit after you apply, reviewing your report and the income you gave.¹²

The fees to watch

The CFPB warns that fees and interest rates on secured cards can be high.¹ The good news: the law makes the issuer put them in plain view. With the application or offer, the issuer has to give you a table (often called the Schumer box) with these items:⁷

Item in the table	What it is
APR (annual percentage rate)	The interest rate for purchases, cash advances and balance transfers
Annual or other periodic fee	What they charge for having the card, and how often
One-time opening fee	What they charge once to open the account
Grace period	The time to pay for purchases without interest, if they give one
Cash advance and balance transfer fees	What it costs to take cash or move debt onto the card
Late, over-the-limit and returned-payment fees	What a mistake costs you

If the required fees or the deposit charged to the card at opening add up to 15% or more of the minimum limit, the table also has to tell you how much available credit remains after they are charged.⁷ Look for that number: it is what you can actually use.

The first-year cap. Under Regulation Z, the total fees you are required to pay in the first year cannot exceed 25% of the limit the account had when it was opened. Late, over-the-limit and returned-payment fees do not count.⁵ The official commentary gives an example: with a $500 limit at opening, the issuer may charge $125 in fees. And it makes a key point for secured cards: if the deposit is charged to the card, it counts as a fee toward that cap; if you pay it separately, it does not.⁶

Penalty fees. A fee for violating the card’s terms cannot exceed the dollar amount associated with that violation. They cannot charge that kind of fee for a purchase the issuer declined, or more than one penalty fee for the same event.⁵

Interest. The APRannual percentage rate (APR)The annual percentage rate (APR) is a broader measure of the cost of borrowing money than the interest rate. Besides the interest, it includes certain loan charges, such as discount points and some lender fees, spread over the life of the loan and expressed as a yearly percentage. That is why the APR is almost always a little higher than the interest rate. It is useful for comparing offers: if two loans have the same interest rate but a different APR, the one with the higher APR charges more in fees.See the full definitionClose is the price you pay for borrowing. On most cards, if you pay the full balance each month by the due date, you pay no interest on purchases.⁹ But companies are not required to give a grace period, and cash advances generally charge interest from the day of the transaction. Your bill must reach you at least 21 days before it is due.¹⁰

How to use it to build history

The card only builds history if you use it well. Most credit scores treat repayment history as the number one factor.¹³ “On time” means the payment reaches the company by the day the bill is due.¹

With a small limit, a normal purchase can use up a large share of it. Experts cited by the CFPB advise using no more than 30% of your total limit, and paying the full balance each month helps you get the best scores.¹³ Paying in full also avoids finance charges and can build better credit than carrying a balance.¹ That share is called credit utilizationcredit utilizationCredit utilization is how much of your credit limits you are using: it compares what you owe on your cards with your total available credit. Scoring models look at how close you are to being maxed out; if you use too much of your limit, your score can drop. According to the CFPB, experts advise using no more than 30% of your total credit limit. If you close cards and move the balances onto one, the share you use can go up. You do not need to carry a balance to have a good score: paying in full each month helps.See the full definitionClose; the guide What moves your credit score explains how it weighs.

Your secured card, from application to graduation

1. 1. Ask and compare

   Before you apply

   Get each card's table and ask in writing whether it reports to all three agencies.³

2. 2. Put down the deposit

   When you open it

   Your limit is usually equal to your deposit. Check how much available credit remains if fees are charged at opening.⁷

3. 3. Set up autopay

   Before the first due date

   An automatic payment or electronic reminder prevents the late payment that costs the most.¹³

4. 4. Use little, pay it all

   Every month

   Use little of the limit and pay the full balance by the due date: on most cards that means no interest on purchases.⁹¹³

5. 5. Check your reports

   Every few months

   Confirm the card shows up and your payments appear on time. If it does not appear, ask the issuer whether it reports.³

6. 6. Ask about graduation

   After months of consistent payments

   Ask them to review your account: your limit may go up and your deposit may be refunded.¹

Moving up to a regular card

Many secured cards have a “graduation” feature to move to a traditional card after a pattern of consistent payments.³ But it is not automatic. In its exams, the CFPB found issuers that said orally the account would convert to unsecured on its own on a set timeline, such as six or twelve months, and did not: graduation depended on other factors. Others advertised “periodic” reviews and went a year or more without reviewing accounts.⁴

That is why it helps to have in writing what they require for graduation and how often they review your account. If they tell you something by phone, ask them to send it to you.

Once you graduate, think before closing the account. Closing a card can raise your utilization and lower your score, and an old account with a good history may help maintain a higher score. Closing it can make sense if the card has annual fees or poor terms that outweigh its benefits.¹⁴

If you fall behind or the terms change

A late payment on a secured card weighs the same as on any card. Credit reporting companies can generally report negative payment information for up to seven years.¹⁶ Recent negative information weighs more than older information, so getting current as soon as possible helps.¹

Your deposit is collateral. The general rule bars the issuer from taking money you have on deposit with it to pay off your card debt, but it does not take away its right to enforce a security interest in those funds that you agreed to.¹⁵ Read in your agreement what happens to the deposit if you fall behind or close the account.

If the issuer lowers your limit, it generally has to give you an adverse action notice with the specific reasons, or the option to request them.¹² If you have past-due debts, a HUD-approved housing counselorHUD-approved housing counselorA HUD-approved housing counselor works at an agency HUD has approved to provide housing counseling: independent, expert advice customized to your situation about buying a home, renting, a missed mortgage payment, a foreclosure or credit problems. The agencies usually charge little or nothing; many serve in Spanish and offer the homebuyer education course several assistance programs require. They are not lenders or real estate agents and sell you nothing. Your county page lists the official agencies with phone numbers.See the full definitionClose can go over your budget and credit with you, often at little or no cost.¹⁷

If this is you

You have never had credit

If you do not qualify for a regular card, the CFPB suggests trying a secured one.¹ Compare it with a credit builder loan in Credit from zero.

You have an ITIN

The issuer may ask for a Social Security number to see your report.¹¹ Ask first whether they accept an ITIN and whether they report to all three agencies.

You are paid in cash

Cash does not build history.² Open a bank account so you can pay the card on time every month.

The deposit is hard to put together

Ask your bank, credit union or a nonprofit agency about other credit-building products.²

Mistakes that cost you

• Mistake: Opening the card without asking whether it reports to the agencies.

  Instead: Ask first and get the answer in writing: no reporting, no history.³

• Mistake: Choosing only by the size of the deposit.

  Instead: Compare the whole table: rate, annual fee, opening fees and available credit.⁷

• Mistake: Believing the card turns into a regular one on its own after six months.

  Instead: The CFPB found promises like that went unkept; get the requirements in writing.⁴

• Mistake: Using almost the whole limit every month.

  Instead: Use little and pay in full: experts cited by the CFPB advise staying at or below 30% of the limit.¹³

• Mistake: Taking cash out with the card.

  Instead: Cash advances generally charge interest from day one.¹⁰

• Mistake: Closing the card as soon as you graduate.

  Instead: Closing it can raise your utilization; an old account with a good history can help you.¹⁴

What to do this week

1. Ask your bank or credit union about secured cards and other credit-building products.²
2. Get the table of rates and fees for each card and compare them; look up their agreements too.⁸
3. Ask in writing whether they report to all three agencies and what you need to graduate.³
4. Confirm whether the deposit is charged to the card or paid separately, and how much available credit remains.⁶
5. Set up autopay for the full balance.¹³
6. Get your reports in a few months to see your card; the guide AnnualCreditReport.com step by step shows you how, and the credit plan puts your steps in order.²