How do secured card deposits work?

Opening Credits columnist Eric Sandberg
Erica Sandberg is a prominent personal finance authority and author of "Expecting Money: The Essential Financial Plan for New and Growing Families." She writes "Opening Credits," a weekly reader Q&A column about issues for people who are new to credit, for CreditCards.com.

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Question Dear Opening Credits,
I just opened a secured credit card and my question is about the secured deposit? I do not know how it works.  – Victor

Answer

Dear Victor,
It’s great that you want to take a deep dive into the ins and outs of security deposits! Since the secured card you have is collateralized with cash, you should know how these credit products function.

In many cases, a secured card’s security deposit matches the credit line you’ve been granted. Some issuers offer hybrid or "semisecured" credit cards in which your credit line exceeds your security deposit. Either way, security deposits protect against nonpayment.

A secured card issuer requires a security deposit because either the applicant does not have a credit history or has a damaged credit history and needs to rebuild their credit profile. Both circumstances are concerning to a credit issuer.

If you haven’t used credit cards or loans before, lenders consider you to be a risky proposition. Maybe you’ll be a responsible borrower, but maybe you won’t. With no past to check, you’re uncharted territory. On the other hand, if you have used credit products before but have paid late, defaulted on accounts, filed for bankruptcy or are deep in debt, you’re a known risk – a bad one. A credit card issuer would be foolish to offer you an unsecured credit card.

How secured deposits work

So, exactly how do secured deposits work? Let’s say you put down $500 and received a credit card that allows you to charge up to that sum. As long as you make the payments on time, the money that’s sitting in that deposit account will remain intact. However, if you were to charge up your card and then stop paying, the issuer would eventually claim what’s owed from the security deposit funds. No lawsuit and judgment would be necessary, as it would for a defaulted unsecured credit card debt. 

While the security deposit greatly reduces the issuer’s risk, it also can act as a protected savings account. Unlike money set aside in a regular savings account, you can’t dip into your secured card’'s security deposit. Instead, the cash will remain with the issuer until you close the card, provided you don’t owe any balance on the card.

Some more vital information about secured credit cards:

 

Video: What is a secured card?

Your payment history should be reported to the credit bureaus

Most, but not all, issuers send secured card activity to the three major credit reporting agencies (TransUnion, Experian and Equifax). If you’re interested in building or repairing a credit history, make sure your secured card is listed on your credit reports.

Only charge what you can repay in 30 days

Secured cards tend to have high interest rates, so it’s especially important you don’t charge more than you can repay when the bill comes due.

Keep the card for at least a year

Twelve months’ worth of responsible payment activity listed on your credit reports should be enough to establish a pattern of good behavior. It also can offset damage that already exists, such as some past delinquencies.

Eventually transition to an unsecured card

After you’ve proven your charging chops, some issuers will upgrade a secured account to an unsecured card and return the deposit to you. If your issuer does not do this, keep the secured card and, if you like, apply for an unsecured card. Use CreditCards.com’s CardMatch tool to find a card suited to your credit score. Having multiple cards in use will populate your credit reports with even more positive payment data.

As you can see, a credit card security deposit is beneficial to both parties!

See related: 3 quick, easy, inexpensive credit score rebuilding tools, How will closing secured card, opening unsecured card affect credit?

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Updated: 08-21-2018