How Much Can A Secured Credit Card Raise Your Score?
There's no guarantee a secured credit card will positively impact your credit score. It depends how you use it and what's already in your unique credit history. Read on to learn how a secured card could help your score.
Opening a secured credit card is a common strategy that people use to help rebuild or build their credit ratings. Most credit card issuers have lenient approval criteria where secured credit cards are concerned. So, these accounts may be a good fit for people who have trouble qualifying for traditional unsecured credit cards.
Despite the popularity of secured credit cards and the many benefits of a secured credit card, it is important to note that credit score improvement is never a given with any financial tool.
So, if you’re asking the question, “How much will a secured credit card raise my score,” here’s the answer. The final impact the account has on your credit rating depends on how you manage the account and how it fits in with the rest of your credit history.
You might already be familiar with the difference between secured vs unsecured credit cards. A secured credit card is a special type of credit card account designed with the credit-challenged consumer in mind. According to the Center for Financial Services Innovation (CFSI), a secured credit card is a tool that “could benefit millions of Americans, especially those with limited or damaged credit.”
When you open a secured credit card, you put down a deposit as collateral with the bank that issues the card. By supplying collateral, you have some “skin in the game,” and you reduce the level of risk involved for the issuing bank. As a result, it’s usually easier to qualify for secured credit cards even if you have no credit history, a thin credit file, or bad credit.
Many secured credit card issuers have a minimum and maximum deposit threshold for their accounts. So, if the lender accepts security deposits between $200 and $2,000, you can choose how much money you want to put down. In general (though not always), the deposit you make determines the credit limit you’ll receive on your account. Some card issuers, however, may give you an opportunity to put down a smaller deposit (i.e., $100) and receive a credit limit that exceeds your deposit amount.
The most important detail to remember about secured credit cards is that you need to manage them just as you would an unsecured credit card account. If you charge $200 on the credit account, it’s best to pay your balance in full by the due date. Paying off your statement balance each month helps you avoid paying credit card interest. The practice of paying in full can also protect you from high credit card utilization and potential credit score damage.
Above all, be sure to pay your bill on time every month. A late monthly payment on secured credit cards could derail your good credit score progress.
How will having a secured credit card help me?
There are several ways that opening a secured credit card could potentially help you build credit. Here are a few examples.
Positive payment history: A secured credit card, like any other type of account on your credit report, represents an opportunity to build a positive payment history. Payment history is the most important credit score factor with both FICO and VantageScore credit scoring models. By doing a credit check and examining how you’ve paid your credit obligations in the past (among other factors), scoring models can predict how likely you are to pay on time in the future.
With FICO® Scores, your monthly payment history is worth 35% of your credit score. If you can use your secured credit card for small purchases and avoid late payments, the account has the potential to help you improve your credit score over time.
Lower credit utilization: Credit utilization measures the relationship between your credit card balances and credit card limits. So, anytime you add a new credit card to your credit report—secured or unsecured—there’s a chance it could help you reduce your overall credit utilization ratio.
Here’s a look at the math.
Aggregate Credit Utilization
Credit Card Limits
2 Open Credit Card Accounts
(2 Credit Cards X $1,000 Limit Per Card)
3 Open Credit Card Accounts
(3 Credit Cards X $1,000 Limit Per Card)
As you can see in the table above, the consumer owes the same $2,000 in total credit card debt in both examples. But when she adds a new credit card to the mix in Example #2, her overall credit limit increases from $2,000 to $3,000. The credit limit increase triggers a drop in her credit utilization rate, which might help her credit score.
FICO bases 30% of your credit score on the “Amounts Owed” category of your credit report. Your credit utilization rate is a major factor here. Paying off your credit card balances each month (preferably before your statement closing date) is the best way to keep your credit utilization rate low. But increasing your credit limits with a new credit card or a credit limit increase might also benefit you.
Credit mix: The mixture of account types on your credit report is another factor that shapes your credit score. When your credit report contains both types of credit (revolving and installment accounts), your credit score could benefit.
Revolving accounts are accounts you can use to borrow money multiple times. You can make a charge, pay your bill, and use the account again—up to a certain credit limit. Credit cards (secured or unsecured) are the most common type of revolving account.
Installment accounts are loans you receive for a fixed amount and repay with fixed payments over a fixed period (aka the loan term). A personal loan, student loan, mortgages, and auto loans all fall under the installment account umbrella.
If you don’t have any revolving accounts on your credit report at present, a secured credit card can be a great way to add a little diversity to your report. (Likewise, if you need to add installment credit to your report, you might consider a credit builder account.) Your credit mix is worth 10% of your FICO Score.
How much can I raise my credit score using a secured credit card?
How much does a secured credit card raise your score? You might feel frustrated to learn that there’s no easy way to answer that question. The credit score increase you earn from a secured credit card (or, indeed, whether your credit score increases at all) depends on several factors:
The other items on your credit report play a role in how a new secured credit card impacts your credit score. Credit scoring doesn’t happen in isolation. In other words, FICO and VantageScore don’t consider just one item on your report at a time, but rather the entire makeup of your credit report as a whole.
For example, if you have no other tradelines on your credit report, the addition of one new account won’t qualify you for a FICO Score right away. FICO’s minimum credit score criteria require you to have at least one account open for six months or longer before you can receive a score.
Likewise, a new secured credit card may have a different impact on someone with damaged credit history versus someone with a poor credit or thin (but otherwise clean) credit file. Someone with a bankruptcy might experience a different credit score result as well.
The same is true of the hard inquiry that occurs when you apply for a new secured credit card. For some people, a hard inquiry might trigger a small credit score decrease. Others, however, might not see a credit score drop at all.
How you manage your new secured card also determines its credit score impact. If you open a new secured credit card and pay it late, the credit account will probably hurt your credit score rather than help it. And if you max out your secured card and cause a high credit utilization rate to show up on your credit report, you might see your credit score decline.
On the other hand, responsible account usage should affect your credit score for the positive over time. On-time payments and a low credit utilization rate are key here, if you hope to see a credit score increase when you open a secured credit card.
What do I need to take into account when using a secured credit card?
We’ve already covered that you need to pay your bill on time every month and keep your credit utilization low. Aside from these details, here are six more points you should consider when you use a secured credit card.
1. Make sure the card issuer reports to all three credit bureaus
If you’re opening a secured credit card to build credit, you’ll want to make sure the card issuer reports the account to the three major credit bureaus. The account needs to appear on all three of your credit reports with Equifax, TransUnion, and Experian to have the biggest potential impact.
2. You don’t need to revolve a balance from month to month
Some people believe that you need to carry at least a small balance on your credit card accounts (secured or otherwise) to earn the biggest potential score increase from the account. This idea, however, is a myth. In fact, credit scoring models reward you for having a 0% credit utilization rate on your credit card accounts. (Note: 1% credit utilization may be slightly better than 0%, but it can be difficult to maintain this percentage.)
3. It’s important to use your account
Credit card issuers sometimes close accounts for inactivity. You don’t have to use your secured credit card every day, or even every month for that matter. Yet you should probably show some account activity on your credit card at least once a quarter to safeguard against potential account closure.
So, if you’re asking “can you rent a car with a secured credit card", yes you can. However, it is important to note that you have to have enough available credit for you to do so. But, using your secured credit card widely and frequently can also be good practice to help prepare you for a traditional unsecured credit card account in the future.
4. Paying your bill before the statement closing date might benefit you
Your credit card balance doesn’t update on your credit report in real time. In fact, most credit card issuers only update your account activity and balance with the credit bureaus once a month.
Whatever your balance is on your statement closing date is the balance that will appear on your credit report. So, if you want a $0 balance to appear on your credit report (and, by extension, a 0% credit utilization rate), you’ll need to pay your statement balance before the statement closing date on your account.
5. A new account won’t wipe out old credit history
Most derogatory credit information can remain on your credit report for up to seven years—and up to 10 years for bankruptcies. These negative accounts may still hurt your credit score as long as they’re present. (Note: As negative credit information ages, it should affect your credit score to a lesser degree.) A well-managed secured credit card may help offset existing credit damage, but it won’t erase negative details.
6. A secured card can be a bridge to better financing options down the road
When your credit improves, you’ll be more likely to qualify for premium rewards credit cards, auto loans, mortgages, and more.
No matter which secured credit card you decide to apply for, remember that your account is simply a tool. You decide how to use the card once it’s open. Use it wisely, and a secured credit card could be a step in the right direction for your credit score.
About the author
Michelle L. Black is a leading credit expert with over 17 years of experience in the credit industry. She’s an expert on credit reporting, credit scoring, identity theft, budgeting and debt eradication. See Michelle on Linkedin and Twitter.
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Written on August 4, 2021
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