What Are Secured Credit Cards?

A secured credit card is a special kind of credit card that banks reserve for applicants with no credit history or a poor credit rating. Because of this, secured credit cards are sometimes referred to as "bad credit" credit cards.

Unlike a conventional (unsecured) credit card, the bank does not in fact extend credit to the cardholder. Instead, the applicant deposits some money — sometimes just $500 — with the bank. That money is used as security by the bank for the cardholder's purchases, which cannot total more than the deposited amount at any given time. This protects the bank: if the cardholder cannot (or won't) pay his or her credit card balance, the bank can recover the money owed simply by closing the account and seizing the cash.

Secured credit cards are often used by first-time credit card applicants with no prior credit history to establish a good credit record. After demonstrating to the bank over a period of time that they can use the card responsibly, the cardholder can apply for an unsecured credit card with a higher credit limit.

Secured credit cards are also used by persons who have declared bankruptcy or have bad credit histories as one means of repairing a bad credit rating.