How to Use Secured Credit Cards to Build Credit

use secured cards to build credit

By Ben Luthi

If you’re trying to build credit, a secured credit card is one of the best tools to help you achieve your goal. But there are some risks involved, and finding the right card isn’t always easy.

In this guide, you’ll learn how secured credit cards can help you improve your credit history and what you need to do to pick the right one.

What is a secured credit card?

A secured credit card works the same as a regular unsecured credit card, with just one difference: a secured card requires a security deposit to use as collateral. This deposit can be as low as $200 or $300 and is usually equal to your desired credit limit.

The credit card issuer holds onto the deposit in case you default on your payments. But with responsible use, the card can help you improve your credit score.

“You get your deposit back when you either close the card after having paid your balance in full,” says Brooklyn Lowery, managing editor for CardRatings.com, “or when you show responsible credit card use and graduate to an unsecured card with the same bank.”

You may even be able to request a credit limit increase without putting more money down.

Once you close your secured card account, you can apply for an unsecured card that doesn’t require an upfront security deposit. But note that closing a credit account gets rid of the available credit associated with it. Also, the account won’t continue to help you with your payment history or average age of accounts.

Also, keep in mind that secured credit cards are not the same as prepaid cards. A prepaid card is a reloadable debit card, not a credit card.

“While prepaid debit cards can be a way to control and manage your spending, you aren’t technically borrowing any money,” says Lowery. “So there’s no opportunity for you to show that you can make good on your debts.”

Will a secured credit card build credit?

The two most important factors in your FICO credit score are your payment history and your credit utilization, which is your card balance divided by its credit limit. In total, they make up 65% of your score.

5 credit score factors

As you use a secured credit card regularly and make your payments on time every month, you establish credit history through building payment history. In fact, if you pay off your balance in full each month, you can build credit without paying any interest on the account.

Also, when you keep your card balance at a reasonable level — the lower your credit utilization, the better — it shows creditors that you don’t need to rely on credit just to get by. A widely accepted rule is to use less than 30% of your credit line each month.

While you use your secured credit card over time, it will also boost your length of credit history, which makes up 15% of your FICO credit score. See our related article about how long it takes to build credit.

As you build credit using a secured card, you don’t necessarily need to open other card accounts or take out a loan to boost your credit building efforts.

That said, having a healthy mix of credit accounts for 10% of your credit score.

A healthy mix means having both revolving credit (like your secured credit card) and an installment loan (like a credit builder loan, mortgage or car loan). So, using a credit builder loan in conjunction with a secured card could help you build credit more quickly since there is no credit score requirement to get one.

How to choose the best secured credit card

There are several secured credit cards out there for people who are looking to build credit, but not all of them are worth considering.

Instead of taking the first offer that comes your way, take some time to research secured cards and what they have to offer.

Here are a few things to look out for when shopping for secured cards…

1 - Look at the fees

Some secured credit cards charge an annual fee and other fees. Others, however, won’t charge you a fee unless you take out a cash advance or request balance transfers.

2 - Make sure they’ll help

Some secured cards don’t report your account activity to all three major credit bureaus. This means that even if you use the card responsibly, it may not help you build your credit history.

Consider the source

Some of the major credit card issuers like Capital One and Discover offer secured credit cards, but most secured cards are issued by banks you may have never heard of. Do your research to make sure the issuer is reputable and offers a good customer experience.

Look for standout features

Some secured credit cards offer basic features while others add extra appeal. With the Self Visa® Credit Card, for instance, there’s no credit check involved. Also, instead of putting down a security deposit, you’ll use savings you’ve built up with your Credit Builder Account so there’s no extra out-of-pocket cost.

Some other secured cards offer the opportunity to earn rewards or a reduced security deposit.

Check with your credit union

Credit unions typically offer lower interest rates and fees than traditional banks.

What to consider before applying for a secured credit card

While secured credit cards can help you improve your credit score, they’re not for everyone. In fact, while you can get a secured credit card with no credit or bad credit, there’s no guarantee.

Secured cards typically require a credit check, and if you’ve made some significant credit missteps in the past, you may get denied.

“You’ll generally need to be able to show a source of income and meet all age and other requirements and then, of course, come up with the funds for the security deposit,” Lowery says.

If you do get denied, a card like the Self Visa® Credit Card may be worth considering. Because once you’re eligible to apply for it, you’re approved. To become eligible, you need to:

  1. Open a Self Credit Builder Account
  2. Make at least your last three monthly payments on time
  3. Have $100 or more savings progress in your account
  4. Have no outstanding fees

If you have been denied a secured credit card, avoid applying for multiple cards to see which one will approve you, since hard inquiries can hurt your credit score. Instead, consider the Self Visa® Credit Card or ask a family member or friend who has good credit if you can get added as an authorized user on their card account.

As an authorized user, you can enjoy the good credit history of their account without the legal obligation to pay the balance. Over time, your credit score can improve, and you’ll have a better chance of getting approved for a card of your own.

If you do get approved for a secured credit card, there are some risks to keep in mind. Even with a small credit line, for example, you may be tempted to spend more on your card than you have in your bank account.

And if you rack up a bill you can’t pay off, you could be stuck paying an interest rate as high as 25% or more. So, if you’ve had problems with overspending in the past or you just want to avoid the temptation altogether, you may be better off with a credit builder loan or some other type of credit altogether.

As a result, it’s essential that you take the time to consider all of your options before making a decision. That includes comparing several secured cards to find the right one for you and also looking at alternative ways to build credit that don’t require you to get your own secured card.

The bottom line

There are several different secured cards on the market, and there’s no single card that’s better than the rest for everyone.

Most secured credit card issuers run a credit check, which means you could be denied based on your credit score or something on your credit report. However, some credit cards don’t run a credit check at all.

Most secured credit cards don’t offer a rewards program. That may not bother you if your top priority is building credit, but if you want to get cash back, consider cards that offer it.

In most cases, you’ll be required to make a deposit equal to your desired credit limit. Also, find out when you can get your deposit back. Because some cards may return it before you close your account, that may be preferable if you want to keep your card open longer.

As you compare these features and consider your preferences, you’ll have an easier time finding the right card so you can start working on your credit.

About the author

Ben Luthi is a personal finance writer who has written for NerdWallet, Student Loan Hero, US News and World Report, as well as other major media outlets. He holds a bachelor’s degree in finance from Brigham Young University.

Written on October 22, 2019

Self is a venture-backed startup that helps people build credit and savings. Comments? Questions? Send us a note at hello@self.inc.

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