What Is a Secured Credit Card and How Does It Build Credit?

If you have no credit history, it can be hard to do things like get a mortgage, find affordable car loans or even rent a bigger apartment.

The easiest place to start building good credit is with a credit card. But how do you qualify for a credit card with no credit?

That’s a problem many consumers face, as an estimated 26 million people in the United States are considered “credit invisible” — meaning they don’t have any credit record — and another 19 million Americans are considered “unscoreable” because their credit information is insufficient or outdated, according to the Consumer Financial Protection Bureau.

If you’re among that group — or you have poor credit in need of rebuilding — a secured credit card may be the route for you.

What Is a Secured Credit Card?

A secured credit card functions much like a traditional credit card, except with one big exception. A secured credit card’s credit limit is based on a refundable security deposit rather than your credit worthiness.

How Secured Credit Cards Work

When you apply for a secured credit card, you’ll put an initial deposit down as collateral, and the bank gives you a credit card with a limit that’s usually equal to your cash deposit. The bank essentially uses your security deposit as your line of credit.

So if you put $200 down, your credit line on most secured credit cards will be $200.

Keep in mind that once you deposit the money, you generally can’t get that cash back until you cancel the card, so make sure you don’t need the money any time soon.

How Does a Secured Credit Card Build Credit?

Secured credit cards can be a great way to rebuild if you have bad credit or no credit at all.

The point of getting a secured credit card is to help create a positive payment history or good creditwhich in turn raises your credit score.

The credit card issuer reports your activity to at least one of the major credit bureaus — TransUnion, Experian and Equifax —…