Acts as a single-use Red Key, allowing Isaac to create new rooms by using the key next to a wall where there would be no conditions that could prevent a (secret) room from appearing there. This is indicated by walls that have red door outlines on them.
Cracked Key's main purpose is to allow unlocking Tainted characters in Home without having to rely on finding the Red Key.
To create a Cracked Key (once unlocked), drop any trinket in a Boss Room or a Treasure Room on any floor before acquiring Dad's Note, including the room Dad's Note is in. After starting the Ascent by collecting Dad's Note, the trinket left behind will have become a Cracked Key in the corresponding room.
While trinkets are fairly common, there is always a chance one doesn't appear naturally. This chance can be avoided by clearing three consecutive floors without taking damage, which is guaranteed to cause Perfection to spawn.
Mom's Box can be helpful for creating Cracked Keys, providing extra trinkets to leave in Boss rooms or Treasure rooms for later use.
Cracked Keys can also spawn in the same condition as any Card.
Little Baggy will turn all Cracked Keys into pills instead, rendering them unavailable, even during the Ascent.
This does not happen with Starter Deck though, as a Cracked Key is considered a card.
Using the Cracked Key in Home having unlocked that character's tainted version or as a tainted character will spawn the item Inner Child in the closet where the Tainted character would normally be found, as long as Inner Child is unlocked, otherwise there will be a shopkeeper.
If found before the Ascent, the Cracked Key can serve as a secret room finder, as secret room entrances do not have red door outlines.
If found during Greed mode, it is normally useless for creating Red Rooms, but can be used to locate the Super Secret Room on a floor by finding which wall does not have a red door outline.