What is a secured credit card?
Our experts explain the difference between secured and unsecured credit cards.
It’s important to understand that lenders need to manage risk to protect their business. They do this through credit checks, setting credit limits or sometimes requiring a deposit.
These measures help ensure they’re lending responsibly.
Estimated read time: 6 mins
Introduction to secured credit cards
Secured cards are not very common, but they offer a unique way to build or rebuild your credit. The applicant will usually need to put down a cash deposit, known as ‘security’. Then if you miss payments, the lender can use part or all of your deposit to cover what you owe.
While secured cards can offer benefits to certain applicants, there are limitations. Generally, you won’t be able to access the deposited funds while your secured credit card account is active.
You’ll typically receive your deposit back when you close the account. Your credit limit can depend on the amount you deposit. The more you put down, the more you may be able to borrow each month.
Some providers offer a credit limit that exceeds your deposit. But in most cases, it will match your deposit.
A secured card can help rebuild your credit history, as long as you can afford the initial deposit and the monthly repayments.
It’s important to remember that many secured cards also charge annual fees and application fees. If you manage your payments responsibly, it could be a valuable step towards improving your credit score.
How do secured credit cards work?
Secured credit cards require a cash deposit that acts as collateral for your credit limit. You can then use the card like a regular credit card, making monthly repayments.
Being on top of your repayments helps build your credit score. You’ll usually get your deposit back after closing your account if everything’s in order.
How to apply for a secured credit card
To apply for a secured credit card, choose a lender that offers them. Complete the online application and provide your personal and financial info.
Next, submit a cash deposit – this usually determines your credit limit. Once approved, you’ll receive your card and can start using it to build your credit.
What are the advantages of a secured credit card?
Secured credit cards can help you build or rebuild your credit. Firstly, they don’t always require a credit check, so they’re accessible to those with limited or poor credit histories.
The cash deposit acts as a safety net, helping you manage your spending. By making payments on time, you can improve your credit score, as these cards report to credit reference agencies.
They also help you get into responsible credit habits, like budgeting and making payments on time.
Lastly, many secured cards can transition to unsecured cards over time. This opens the door to better credit options in the future.
How do secured credit cards help build credit?
Secured credit cards can help build credit by offering a credit card to those who may otherwise be refused. They do this by requiring a cash deposit that acts as collateral.
When you use the card and make payments on time, these positive payment activities are reported to credit reference agencies.
This consistent, responsible use may improve your credit score over time, helping your credit profile.
What are unsecured credit cards?
Most credit cards are unsecured, meaning you don’t need to put down any cash or assets as a guarantee.
Instead of a deposit, lenders assess your credit history to see if you have a track record of borrowing and repaying money responsibly.
This makes it easier for you to access credit without upfront costs.
How can you get an unsecured credit card?
Usually, you’ll be offered an unsecured credit card if you have a good credit history. However, there are options available for those with poor or no credit history, like the Vanquis Credit Builder Credit Card.
These cards usually have a lower credit limit and a higher APR than standard unsecured cards. This helps the provider manage the risk of lending without collateral.
When used responsibly, these cards can help rebuild your credit history over time. This could then mean you get access to mainstream credit again in the future.
Can you build credit with an unsecured credit card?
Building your credit score works in the same way for both secured and unsecured credit cards. To improve your score, you need to keep your accounts healthy by making timely payments.
This demonstrates responsible borrowing to lenders. Also, it helps to use a card regularly without exceeding your limit, while making sure you keep up your payments. Plus, avoid applying for multiple credit accounts at once. These practices can often have a positive impact on your credit score over time.
Over 5 million customers have already been accepted for a Vanquis Card
Vanquis Credit Builder Credit Card
Apply for the Vanquis Credit Builder Card and take the first step towards improving your credit score.
With a personalised credit limit and easy management through our app, you can build your financial future confidently.
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Frequently Asked Questions
Can you be declined for a secured credit card?
Yes, it’s possible to be declined for a secured credit card, even though they can be easier to get than unsecured cards. Lenders may still consider things like your income, ability to pay the deposit, and bad credit history. It’s a good idea to check your eligibility before applying.
How quickly does a secured card build credit?
A secured credit card could boost your credit score in a few months, as long you make payments on time and stay within your credit limit. Regular use and responsible management are key. Many users see improvements in their credit scores within three to six months of consistent and responsible activity.
Can I get a secured credit card with a 500 credit score?
It can sometimes be possible to get a secured credit card with a 500 credit score. Secured cards are designed for individuals with lower credit ratings. However, approval depends on the lender’s specific criteria. So check their requirements and make sure you can put down the necessary deposit.
What are the risks of a secured credit card?
The risks of a secured credit card include the potential loss of your deposit if you miss payments or exceed your credit limit. Additionally, some secured cards may have higher fees and interest rates. Using the card irresponsibly can damage your credit score even further, not improve it.