How to Use Secured Credit Cards to Build Credit
By Ben Luthi
Reviewed by Lauren Bringle, AFC®
If you’re trying to build credit, a secured credit card is one of the best tools to help you achieve your goal. That may be why a lot of people consider them "credit-building credit cards".
So, how does a secured credit card work? In this guide, you’ll learn how you can use secured credit cards to help you improve your credit history and what you need to do to pick the right one.
Ready to find the best credit cards to build credit? Read on to find out how.
In this article
What is a secured credit card?
A secured credit card works the same as a traditional unsecured credit card, with just one difference: a secured card requires a security deposit to use as collateral for the credit limit.
The minimum security deposit can be as low as $200 or $300 and is usually equal to your desired credit limit
. The security deposit is refundable, and the credit card issuer holds onto the security deposit in case you default on your payments.
Having the security deposit gives secured credit card issuers confidence that they will be paid back even if the cardholder has bad credit or a below average credit score
Learn more about how security deposits work for secured credit cards
With responsible use, a credit card can help you improve your credit
“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.
When 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.
Secured credit cards are not the same as prepaid cards. A prepaid card
is a reloadable debit card, not a regular 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.
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.
In addition to making timely payments, 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 learn how to build credit fast by 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 credit 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 you will have two types of credit on your credit report.
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 an annual 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 with a credit bureau.
Unlike a debit card, savings account or checking account, opening a credit card and using it responsibly can help you build good credit. If you open a credit card that is reported to all three major credit bureaus, you can build up your credit in a way that is recognized by future lenders, no matter what bureau they pull your credit report from.
3 - Consider the source
Some of the major secured 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.
4 - 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 hard 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 deposit needed.
Some other secured cards offer the opportunity to earn rewards or a reduced security deposit.
5 - Check with a 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 that the card will help your improve your credit.
Secured cards typically require a credit check, and if you’ve made some significant credit missteps in the past, you may get denied. As a future cardholder, the best thing you can do is to fix your poor credit or work on improving your score so you can avoid being denied by your bank.
“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.
Options if you've been denied
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 an alternative 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 credit card account without the legal obligation to pay the balance to the card issuer. Over time, your credit score can improve, and you’ll have a better chance of getting approved for a card of your own from your desired credit card company.
Beware of the risks of credit cards
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 don't pay your balance in full each month, 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.
Benefits of getting a secured credit card
Don’t know whether you should go for a secured credit card or a traditional credit card? Before you go the traditional route, make sure you review the many benefits of a secured card so you can make an informed decision.
You can apply for a secured card with no credit
One of the most significant benefits is that people with poor credit or no credit history at all can still apply for a secured credit card.
With an unsecured card, most banks will not risk giving someone credit unless they can prove they have a strong credit history. With a secured credit card, all you have to do is pay a cash deposit that will serve as a safety net if you are ever late on your payments.
Keep in mind that some card companies will deny you for a secured card if you have a history of bankruptcy or foreclosure.
You have a chance to re-establish credit
Another benefit is that you can re-establish good credit if you’re using a secured card.
Unlike a prepaid card, your payments should be included in your credit report and can improve your score as long as you are making payments on time and keeping your credit card balance low.
Once you have been able to show that you can make on-time payments and you build up your score, you will then have more financial freedom to qualify for other credit cards in the future.
Something to keep in mind
If you are late on your payment, your card issuer will likely enforce a late payment penalty. Although there are federal limits to how much can be charged for a late fee, try to always make your payments on time. Paying on time will save you late fees and accrued interest.
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 that type of reward.
In most cases, you’ll be required to make a security 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 with your credit card company. 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.
We went ahead and summarized everything you need to know about using secured credit cards to build credit in the following infographic. To share it on your own site, just copy and paste the embed code below.
About the author
Ben Luthi is a personal finance writer who holds a bachelor’s degree in finance from Brigham Young University. See Ben on Linkedin
About the reviewer
Lauren Bringle is an Accredited Financial Counselor®
and Content Marketing Manager with Self Financial – a financial technology company with a mission to help people build credit and savings. See Lauren on Linkedin
Our goal at Self is to provide readers with current and unbiased information on credit, financial health, and related topics. This content is based on research and other related articles from trusted sources. All content at Self is written by experienced contributors in the finance industry and reviewed by an accredited person(s).