Put $300 down and you hold a card with a $300 limit. That is the whole trick behind a secured credit card, and it is why graduates with a diploma and an empty credit file keep ending up with one.
The cash is the bank’s protection. Experian describes it as collateral: if you stop paying, the issuer takes what you owe out of the deposit. Because that risk is covered, approval comes easier than it does for an ordinary card, even for someone with poor credit or none at all. Experian lists young adults and recent immigrants among the people who tend to land here.
What the deposit does, and when it comes back
Deposits typically start at $200, Experian says, though some issuers let you go higher or lower. Your limit usually matches the amount. Add more money, or string together enough on-time payments, and the limit may grow.
The money does not sit there forever. With steady payments you generally see it again when the card is converted to an ordinary unsecured one, or once the account is shut. NerdWallet’s Canadian guide is blunter about the wait: some issuers need as long as 150 days to send the money. In Canada, it says, minimum deposits generally fall between $50 and $500, and the ceiling can reach $10,000.
One catch trips people up. You cannot pay the monthly bill out of the deposit. Miss the payment and the damage lands on your credit scores anyway.
Making it count
A card only builds credit if the issuer reports to the bureaus. NerdWallet puts it plainly: when payments go unreported, the card has no effect on your credit. Experian suggests choosing an issuer that reports to all three major bureaus, Experian, TransUnion and Equifax, since some issuers send data to just one or two.
The habits are dull, and that is the point. Put one small recurring bill on the card, a streaming subscription for instance, and set autopay. Pay the balance in full every month so no interest piles up. Keep utilization low: Experian warns that going past about 30% of the limit weighs on your score, so on a $300 card, stay under $90. NerdWallet adds that payment history makes up 35% of a score.
Patience is the hard part. A first FICO score needs an account that is six months old and has shown activity within those six months, Experian says, while a VantageScore can appear as soon as the card is reported, usually within two months. NerdWallet reckons about a year of responsible use should lift your score, with a lift possible after as few as three. Experian puts the wait for an upgrade offer at six to 12 months.
There are costs. Limits are low, rates tend to run higher than on unsecured cards, and some secured cards charge annual, late or foreign transaction fees. Experian also advises keeping the secured account open after an upgrade, because closing a card cuts your available credit.
Experian also has a practical tip. Before sending any money, compare the deposit, the refund policy and the fees, and confirm that the issuer sells an unsecured card you can move up to.
Sources
- What Is a Secured Credit Card? (Experian)
- What Are Secured Cards And How Do They Help? (NerdWallet Canada)
