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What is a Secured Credit Card and How Does it Work?

A credit card can be a powerful personal finance tool—and can be easy to get one if you have a good credit score. But what if you're just starting out and have no credit history? Or what if you've had some difficulties and your credit score has taken a hit?

One option may be a secured credit card. It differs from an unsecured credit card in several important ways, but the main difference is that the card holder must make a security deposit as collateral when opening the secured credit card account. The security deposit serves as collateral for when the card holder uses their account to transact. If the card holder fails to make payments on time or otherwise defaults on their account, the financial institution can use the deposit for the outstanding balance.

How do secured credit cards work?

Before banks, credit unions, and other financial institutions issue traditional credit cards, known as unsecured credit cards, they check several factors, including the credit score of the applicant. The credit score helps a financial institution understand the applicant's credit management.

The credit limit on the card is usually equal to the security deposit. If you deposit $500, for example, you'll be able to use the card for up to $500 in purchases, if you have been approved for that credit limit as well. Some financial institutions require that you open a separate checking or savings account for just your credit card security deposit.

When you use the secured credit card, you'll have to make at least the minimum monthly payments on time. Your statement might allow for a minimum payment, but paying off the full amount each month will minimize the amount of interest you pay.

Who may benefit from a secured credit card?

Secured credit cards may be helpful for individuals who have no credit history or a fair-to-poor credit score. Let's look at each one.

No credit history: The major credit bureaus have no information on your use of credit, even if you're responsible and have achieved financial stability. These individuals are sometimes called "credit invisible."1

This could be because you prefer to pay for everything with cash. Possibly it's because you've never applied for a car loan or mortgage. Or it could be because you're fresh out of high school or college and previously relied on your parents' credit cards.

Poor credit score: When looking specifically at FICO® credit scores, in general, a credit score below 580 is considered poor, and between 580 and 669 is considered fair.2 With scores in this range, you may qualify for a secured credit card, even if you could not qualify for an unsecured one. However, the terms might include a lower credit limit, higher interest rates, and less benefits.

How do secured credit cards help build credit?

A secured credit card can help you to build a track record of responsible use of credit. Typically, the credit card issuer will report your monthly activity to the credit bureaus and that information affects your credit score.

The card can offer you the chance to do at least three things that impact your credit score:

  1. Establish a record of using credit

  2. Build a history of paying the right amount on time

  3. Set a favorable credit utilization rate

The credit utilization rate is the percentage of your credit limit that you are using. A general rule of thumb is that 30% is a good rate. That means that if you have a $500 credit limit, you keep your balance at around $150 a month or lower.3

By getting a secured credit card—and using it responsibly—you could increase your credit score.

Secured credit card benefits

Play video TD cash secured

With a secured credit card, you may be able to help improve your credit score and credit history. Here's a quick review of the benefits of secured credit cards.

  • Build or rebuild credit. As we've noted, a secured credit card can help you establish your credit history and raise your credit score
  • Approval with low/no credit. Because you are securing your own credit limit, you could be approved for a secured credit card even if your credit score is low and your credit history is nonexistent
  • Graduation to an unsecured card over time. After using a secured credit card responsibly and meeting requirements outlined by your card issuer, the credit card issuer may graduate you to an unsecured card. Or you may be able to request one and receive approval. Each issuer has their own graduation requirements for secured credit cards, if offered, so be sure to check them
  • Credit card rewards and perks. Some secured credit cards come with benefits like those offered with unsecured cards, such as cash back rewards and travel points

Considerations with a secured credit card

There are a few things to keep in mind before you fill out your secured credit card application.

  1. Initial deposit requirement. You will be required to make a minimum-security deposit, typically around $200 to $500, so you’ll have to set that amount aside while you have the account open. One way to do this is by securing your card with the money in a checking or savings account

  2. Fees and interest rates. Be sure to ask about application fees, annual fees, late fees, and interest rates. Secured credit card interest rates might be higher than the rates on unsecured cards. Look for the cards with the lowest rates and fees

  3. Limited credit card rewards and perks. Some issuers offer rewards, but they might not be as generous as those that come with unsecured cards. If this is important to you, look for the card that best meets your needs

Credit Cards offered at TD Bank

The right credit card account from TD Bank can help you achieve your financial goals.

  • TD Double UpSM Credit Card

    Earn 2% unlimited Cash Back—no rotating Spend Categories, no caps or limits*

  • TD Cash Credit Card

    Earn 3% and 2% Cash Back on your choice of Spend Categories.* Plus, you can switch your categories quarterly

  • TD FlexPay Credit Card

    0% intro APR* for first 18 billing cycles after account opening. After that, 18.24%-28.24% variable APR based on your creditworthiness

This article is for general informational purposes only. It is not intended to provide specific financial, investment, tax, legal, accounting, or other advice and should not be acted or relied upon without the advice of a professional advisor. A professional advisor will recommend action based on your personal circumstances and the most recent information available.

1For more information about the term "credit invisible" please visit: https://www.consumerfinance.gov/about-us/blog/who-are-credit-invisible/

2Details about FICO® credit scores can be found at: https://www.myfico.com/credit-education/credit-scores

3Details about recommended credit utilization rates for secured credit cards can be found at: https://www.equifax.com/personal/education/credit-cards/articles/-/learn/what-is-a-secured-credit-card-do-they-build-credit/

TD Double Up Credit Card
*Read important Credit Card Terms and Conditions for details about rates, fees, eligible purchases, balance transfers and rewards program rules. If you take advantage of a 0% introductory or promotional Annual Percentage Rate (APR) balance transfer offer and then use your Account to make new purchases, you can avoid paying interest on those new Purchases if you pay each month by the payment due date the “Payment to Avoid Purchase Interest” amount shown within the ‘Payment Information’ box on your account statement.

TD Cash Credit Card
*Read important terms and conditions  for details about rates, fees, eligible purchases, balance transfers and rewards program rules. If you take advantage of a 0% introductory or promotional Annual Percentage Rate (APR) balance transfer offer and then use your Account to make new purchases, you can avoid paying interest on those new Purchases if you pay each month by the payment due date the “Payment to Avoid Purchase Interest” amount shown within the ‘Payment Information’ box on your account statement.

TD FlexPay Credit Card
*Read important terms and conditions  for details about rates, fees, balance transfer rules. If you take advantage of a 0% introductory or promotional Annual Percentage Rate (APR) balance transfer offer and then use your Account to make new purchases, you can avoid paying interest on those new Purchases if you pay each month by the payment due date the “Payment to Avoid Purchase Interest” amount shown within the ‘Payment Information’ box on your account statement.

TD Clear Visa Platinum Credit Card with a $1,000 Credit Limit
*Read important terms and conditions  for account details. The Clear Platinum Visa Credit Card with $1,000 Credit Limit has a $10 monthly membership fee. The monthly membership fee will be added to your monthly billing statement each month as a charge, whether or not you use your account, and applied against your available credit like other charges.

TD Clear Visa Platinum Credit Card with a $2,000 Credit Limit
†Read important terms and conditions  for account details. The Clear Platinum Visa Credit Card with $2,000 credit limit has a $20 monthly membership fee. The monthly membership fee will be added to your monthly billing statement each month as a charge, whether or not you use your account, and applied against your available credit like other charges.

TD First Class Visa Signature Credit Card
*Read important Credit Card Terms and Conditions for details about rates, fees, eligible purchases, balance transfers and rewards program rules. If you take advantage of a 0% introductory or promotional Annual Percentage Rate (APR) balance transfer offer and then use your Account to make new purchases, you can avoid paying interest on those new Purchases if you pay each month by the payment due date the “Payment to Avoid Purchase Interest” amount shown within the ‘Payment Information’ box on your account statement.

4Bonus miles will be reflected on your credit card statement 6 to 8 weeks after a qualified first purchase and/or 6 to 8 weeks after $3,000 in total net eligible purchases made within the first 6 billing cycles of your credit card account opening date. This offer is non-transferable. This One-Time Bonus Offer is not available if you open an account in response to a different offer that you may receive from us or if you previously received a One-Time Bonus Offer on this account or any other account with us. Eligible purchases do not include purchases of any cash equivalents, money orders, and/or gift cards or reloading of gift cards. Groceries purchased from superstores and/or warehouse clubs may only earn 1 mile for each dollar spent.

TD Cash Secured Credit Card
*Read important Credit Card Terms and Conditions for details about rates, fees, eligible purchases, balance transfer and rewards program rules. Eligible purchases do not include purchases of any cash equivalents, money orders, and/or gift cards or reloading of gift cards.

TD Business Solutions Credit Card
*Read important terms and conditions  for details about rates, fees, eligible purchases, balance transfer and rewards program rules. The person applying for the account is individually liable for the payment of all balances on the account and all cards issued pursuant to this application.

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