Graduating from a secured card to an unsecured card

Secured credit cards are great options for people who have no credit history, poor credit or need to rebuild their credit, but the benefits of a secured card are limited – offering minimal long-term value.

With a secured credit card, your credit limit is low, typically equal to a security deposit required by the card issuer. Plus, rewards are typically not available.

Nevertheless, with successful use of secured cards, your credit rating can be boosted by establishing positive payment history – paving the way to “graduate” to an unsecured card with the same bank. That can mean a higher credit line or limit, more perks and a chance to reap rewards. Plus, you can get the security deposit returned.

How do secured credit cards work?

A secured credit card is guaranteed by a cash deposit that a cardholder makes when they open the account. Generally, the deposit will equal the new credit line. For example, if you are approved for a $500 credit limit, you’ll need to deposit $500 to cover your spending.

This arrangement is used as collateral by the lender. If you don’t pay your credit card bill, the bank will deduct funds from your deposit to cover your unpaid expenses.

For people with no credit, poor credit or who are rebuilding their credit, it can be challenging to get approved for an unsecured credit card. Less-qualified borrowers will build confidence and credit history by paying bills on time and by managing spending.

Secured cards are ideal for these situations because the cash deposit you put down vastly reduces the amount of risk the issuer takes. If you charge up a large balance and are delinquent on your debts, your secured card issuer has the right to take what you owe from the funds it has held in deposit.

A well-managed secured card will establish a record of on-time payments, which is an important factor that impacts your creditworthiness.

See related: The factors of a FICO credit score

Secured credit cards can also help improve your credit, if you pay on time each month. When you pay on time, you are demonstrating good credit habits, which are being reported to the major credit bureaus. This new information can improve your credit score.

How do secured cards differ from unsecured credit cards?

A secured credit card requires a refundable security deposit. These funds are not utilized when purchases are made using the secured card – unless the account balance is not paid. Essentially, if charges are paid on time, the money you provided for security is not depleted. But if you do not pay the balance on your credit card, the balance will be taken from your security deposit to cover the unpaid charges.

In the case of an unsecured card, a security deposit is not required. Instead of money being taken from a security deposit, the cardholder is extended a line of credit and charged interest and fees for balances that are paid late.

Secured cards that graduate

Some credit card issuers will re-evaluate your credit history (usually after six months to a year) to determine if you qualify for an unsecured product. If this assessment is favorable, the account will transition and you’ll get your deposit back. If not, it remains secured.

Your secured card offers a credit limit equal to the amount of your refundable deposit – until you get approved to “graduate” to an unsecured credit card. The next step is getting an unsecured card with a credit line.

The amount of time to wait before graduating to an unsecured credit card can vary by issuer. You can expect to wait up to one year, but some lenders consider an upgrade to an unsecured card in as little as five or six months.

When transitioning to an unsecured card, it is customary for lenders to be conservative with a credit limit. As your credit score increases, you may be able to request a higher credit limit.

See related: 6 things to know before requesting a credit-line increase

Here’s a sampling of secured cards and what’s required to upgrade to an unsecured card:

Secured card name	Graduation requirements
Discover it® Secured Credit Card	Account reviewed after at least 8 months of positive payment history
BankAmericard Secured Credit Card	No official timeline, but reports indicate account may graduate at 12 months
Navy Federal Credit Union nRewards Secured Credit Card	Account will be regularly reviewed (starting 6 months after account opening) for deposit return and upgrade to cashRewards card
Secured Mastercard® from Capital One	No official policy, but some users have reported success graduating after first year
Citi® Secured Mastercard®	Account is reviewed after 18 months (some report graduation at 12 months)
First National Bank of Omaha Secured Visa	Account is reviewed after 11 months

Other options for graduating from a secured card

While not all secured credit cards automatically review an account to graduate, you can often request that your issuer upgrade you to a different product. Typically, you will have the best luck with your assessment after six months to a year of paying on time.

See related: How to switch to a new credit card from the same bank

By sticking with your card issuer and opting for a different card, you can elect for something with better rewards, a higher credit line or a lower interest rate. Plus, in some cases, remaining with the same issuer means no application and no credit check – which means no impact on your credit score.

You are also free to find unsecured card offers from other issuers. Because your payment history from the secured card is reported to credit bureaus, you can be evaluated with this updated information. Good places to start are unsecured cards designed for those with poor credit or checking for prequalified offers to make sure you have a good chance of approval.

Boost your chances of scoring an unsecured card

Whether you are trying to graduate or apply for a new product, there are some basic steps everyone can follow to improve their credit score and boost their chances of being approved for an unsecured card.

• Pay on time.
• Keep credit utilization low, if possible.
• Stay within your deposit limit.
• Keep track of your credit score and other accounts.
• Pay your other debts, including loans and other credit cards.
• Consider increasing your deposit amount to increase your available credit.
• Make payments in excess of the minimum payment.

Bottom line

For people with poor credit, secured credit cards can help you build your credit and establish a positive payment history.

Once your credit score improves, it will be possible to make the transition to an unsecured card, which can offer you better benefits, including lucrative rewards like cash back, miles and points. Being responsible with your payments and your credit score is the quickest way toward unlocking a better product.