A card payment from a secured account is a transaction made using a credit card that’s backed by a cash deposit. This deposit, which is typically equal to the credit limit of the card, acts as collateral for the credit card company and reduces its risk. Individuals with minimal or bad credit history often use secured cards to build or rebuild their credit. Making timely payments and demonstrating responsible use gives cardholders the chance to prove financial reliability and improve their credit scores.

As of September 2023, the largest US financial institutions held about 3.7 million secured cards, with $817 million in balances. Below, we’ll explain how secured card payments work, how they differ from other card payments, and what businesses need to know about them.

What’s in this article?

• What is a secured credit card account?
  
• How does a card payment from a secured account work?
  
• How are card payments from secured accounts different from other card payments?
  
• Benefits of secured cards
  
• What businesses need to know about card payments from secured accounts
  

What is a secured credit card account?

A secured credit card account is a type of credit card that requires a refundable security deposit as collateral. This deposit is typically equal to the credit limit. For example, if you deposit $500, your credit limit might be $500. This card enables individuals with minimal or bad credit history to establish or rebuild their credit.

How does a card payment from a secured account work?

Here’s how to establish and use secured accounts for credit cards:

• When you open a secured credit card account, you make a deposit that usually matches your credit limit. For instance, a $1,000 deposit would generally give you a $1,000 credit limit.

• You use the secured credit card just like a traditional credit card to make purchases at stores, online, or anywhere credit cards are accepted.

• You receive a monthly statement with your balance, which includes purchases, any fees, and interest, if applicable. You must make at least the minimum payment by the due date and you must pay your balance in full to avoid any interest charges. The credit card company reports your payment history to credit bureaus. Consistent, timely payments can improve your credit score over time.

• The initial deposit is refundable, and you typically receive it when you upgrade to an unsecured card or close the account with all outstanding balances paid off.

How are card payments from secured accounts different from other card payments?

Card payments from secured accounts function just like any other credit card payment, but secured accounts require an initial cash deposit, have certain credit limits, and reduce the risk for the card issuer. Here are the differences between secured and unsecured cards.

• Deposit requirement: Secured cards require a cash deposit that serves as collateral and typically matches the credit limit. Unsecured credit cards don’t require a deposit.

• Credit limits: For secured cards, the credit limit usually equals the deposit amount. For unsecured cards, the limit depends on the cardholder’s creditworthiness, which is determined by credit history, income, and other financial factors. This limit is often higher than that of a secured account.

• Approval criteria: Secured cards are easier to obtain because the deposit lowers the issuer’s risk. These cards are often available to individuals with minimal or no credit history, while unsecured cards require higher credit scores and have more strict approval criteria.

• Credit building: While both types of cards report payment activity to credit bureaus, secured cards are specifically tools for building or rebuilding credit.

• Fees and interest rates: Secured cards can have higher interest rates and more fees than some unsecured cards. This is partly to offset the risk of lending to individuals with lower credit scores.

• Lender risk: The deposit on a secured card reduces the issuer’s risk since the issuer can use it to cover debts if the cardholder defaults. Unsecured cards have a higher risk for the issuer, which is why issuers are more selective in approving these applications.

Benefits of secured cards

Here are some benefits of using secured cards.

• Credit access: Secured cards are more accessible to people with low credit scores or minimal credit histories. This makes them ideal for newcomers to credit or those recovering from financial setbacks.

• Credit building: Secured cards report to the major credit bureaus (e.g., Experian, Equifax, and TransUnion in the US) and can improve the credit scores of users who make consistent, on-time payments.

• Responsible spending: The credit limit on a secured card is typically equal to the cardholder’s deposit. This helps instill financial discipline as it limits spending to the amount of money the cardholder can afford to set aside as a deposit.

• Potential upgrades: Many issuers offer cardholders the option to graduate to an unsecured card after a period of responsible usage. By graduating, cardholders often receive their deposit back, a higher credit limit, and potentially better terms and benefits.

• Protective features: Unlike debit cards or prepaid cards, secured credit cards have the protection benefits of credit cards, such as fraud protection under the Fair Credit Billing Act.

• Educational resources: Many card issuers provide educational tools alongside secured cards to help users understand credit and better manage their finances. This can especially benefit those new to managing credit.

What businesses need to know about card payments from secured accounts

Here’s what businesses need to be aware of when accepting payments from secured cards.

• Transaction process: There is no difference in the transaction process between secured and unsecured credit cards. Businesses can process both types of cards in the same way through a payment gateway.

• Credit limitations: Customers using secured cards often have lower credit limits. This might affect the types of purchases they can make or their ability to complete larger transactions. Businesses should note this when they consider upsells or promotions.

• Approval rates: Secured cards can sometimes have higher approval rates than unsecured ones for transactions within their limits, because a cash deposit backs them. This lowers the risk of payment denial due to lack of funds or credit issues.

• Customer behavior: Users of secured cards might be more consistently cautious with spending, driven by a desire to build credit. Businesses can support this audience with clear, up-front pricing and excellent customer service to avoid disputes and encourage repeat business.