If your credit score has stumbled because of past problems, a secured credit card can help you rebuild it. By building your credit, you’ll improve your chances of qualifying for the best credit card offers.
Secured credit cards give you another go at managing credit. If you pay on time and spend responsibly, you’ll begin building a more solid credit history. Over time, your positive credit will carry more and more weight relative to your past credit mistakes, helping your credit score.
Others may be new to credit altogether. If you don’t have a credit history, you definitely want to change that situation. Building credit now can make it possible to borrow for the things you’ll need later in life. It’s a smart money move that can improve your future financial well-being.
Whether you’re trying to repair your credit or build it from scratch, a secured credit card is a great financial tool that can help you improve your credit score. And you don’t need to run a balance to do it.
How do secured credit cards work?
A secured credit card is a simple financial tool to help you build or rebuild credit. When you first receive it, you’ll notice that it looks just like a regular credit card. And like with a regular credit card, your positive credit behavior can help you build credit.
The key to building credit with a secured credit card is to pay your bill on time and keep your credit utilization low. As you build a consistent history of responsible credit behavior, your credit score will improve over time. This means that you’ll also need to stay responsible with all other loans and credit products that you may have.
You’ll receive an account statement every month, just like a regular credit card. But don’t expect to be able to use your secured credit card for large purchases, since your credit limit will be capped by your security deposit. Security deposits typically start at around $200.
After you’ve built enough credit, you can move on from a secured to an unsecured credit card. You’ll be able to get your security deposit back, and in some cases, your credit card issuer may be able to offer you an unsecured credit card.
Can you be turned down for a secured credit card?
Secured credit cards get their name from the security deposit they require. It’s there to act as collateral in case of non-payment on your credit line. That’s why it’s easier to get approved for a secured credit card than for a regular one.
But that doesn’t mean that everyone who applies for a secured credit card gets one. Credit card companies will look at the information available in your credit report and any other information they can get on your creditworthiness.
If your application is declined, the Equal Credit Opportunity Act requires the issuer to provide you with a notice that tells you exactly why your application was rejected. This notice can include the credit score they used.
If they don’t provide the information, you should ask the credit card issuer to furnish it and ask within 60 days. That’ll provide you valuable feedback on where you need to improve.
» Further reading: How to build your credit history from scratch.
How to open a secured credit card
Opening a secured credit card in the U.S. is straightforward. In general, you’ll need to have a:
- Social security number
- U.S. address
- U.S. bank account
- And be 18 years or older to apply
Most issuers accept applications online, which you can complete in a few minutes. If you’re approved, you’ll need to provide your security deposit before you can receive your credit card.
Since credit utilization is an important factor that influences your credit score, it’s best to provide as big a deposit as you can afford. In line with that, our recommendation is to use your card for small purchases and to keep your balance within 30% of your credit limit. That’s viewed as a good credit utilization percentage by credit scoring companies.
» Further reading: A beginner’s guide to understanding credit scores.
Is a secured credit card right for you?
Secured credit cards aren’t the only tool available to build credit. There’s additional methods you can consider to improve your credit score, especially if you’re new to credit. You could, for example:
- Become an authorized user on somebody else’s unsecured credit card or
- Find someone with good credit to cosign a personal loan for you, if you need the money
The following video, courtesy of Experian, provides a brief recap of these credit-building methods:
The issue with employing these additional methods to build credit is that they require the participation of someone else. Likely a family member. That may work out well for you, or it may not. It depends on your personal situation.
With a secured credit card, on the other hand, you don’t need to rely on someone else’s good credit to improve yours. So, is a secured credit card right for you?
Consider a secured credit card if the following applies to you:
- You’re looking to build or rebuild credit
- Cannot get approved for a regular, unsecured credit card
- Have the funds to make a security deposit of $200 or more
- Can’t or don’t want to become an authorized user on someone else’s credit card
How to use a secured credit card to build credit
Building credit is all about demonstrating that you can manage credit responsibly, To do that, focus on the following points as you use your secured credit card:
» Make your payments on time. Your payment history represents the lion’s share of your credit score. So paying your credit card bill on time is key to building credit.
» Pay at least your minimum due. You should pay off your entire balance on your secured credit card every month, if you can. If you can’t, at least pay your minimum due.
» Keep a low credit utilization. Another important component of your credit score is your credit utilization. Your utilization for any given month is calculated by dividing your balance by your total credit line. Credit scoring companies consider 30% or less as a good credit utilization rate.
» Don’t carry a balance. You don’t need to carry a balance month to month in order to build credit. Make small charges every month and pay your bill in full. You can charge a small amount – even as little as $7 a month to build your credit history. But you’re likely to charge more than that. So use your card only for small, constant purchases you can pay off.
» Stay responsible with your other credit commitments. If you have other outstanding loans or credit cards, it’s important that you also make your payments on these on time. Credit bureaus incorporate your credit behavior on all of your outstanding loans and credit cards. If you’ve been overdue or delinquent, look for ways to pay off your debt and negotiate with your creditors.
Building credit takes time and consistency. While some people can see improvements in a few months, others may need more time. Seeing results requires patience.
How to transition from a secured credit card to a traditional credit card
Some credit card issuers will have an automatic account review process to check your eligibility for an unsecured credit card after several months of activity. If you’ve used your card responsibly, they’ll offer to “graduate” you to an unsecured credit card.
But other issuers either don’t offer unsecured credit cards or don’t automatically review your account to offer an unsecured credit card. In those cases, it’s useful to monitor your credit score often with a third party service.
Before applying for an unsecured credit card, you can check your chances of being approved without affecting your credit score. Some card issuers offer electronic pre-approval forms.
These forms require simple information including your:
- Income information
- Housing status
- Your date of birth to verify you’re 18 or older
- Your social security number
These forms are easy to find on the internet. Take advantage of them to see if you’re pre-approved for a regular credit card.
Not all secured credit cards report to the three major credit bureaus. Review the fine print in your credit card terms to verify they report card payments to the credit bureaus.
Accumulating a good credit history takes time. To improve your credit faster, pay down debt and reduce your use of revolving credit. Correcting inaccuracies in your credit reports also helps your credit score.
Some credit card issuers do and others don’t. If you choose a card that doesn’t require a credit check, review their terms to make sure they’ll report your payments to the credit bureaus.
About three weeks following approval. If your issuer takes longer, call for a review.