How To Build Credit With A Secured Credit Card

If you’re just starting out on your credit journey, you may hope to better your credit score with a secured credit card. Or if your credit score has taken a negative hit, you might be looking for a secured card to help you rebuild credit. This guide helps you understand the ins and outs of secured credit cards and how to use secured cards to build credit.

What is a secured credit card?

A secured credit card requires a cash deposit upfront as collateral, typically placed in a savings account or certificate of deposit (CD). In most cases, the credit limit for the account equals the initial security deposit, as secured cards require applicants to provide a cash security deposit.. Deposits can range from as low as $100 to as high as several thousand dollars. If you need a higher credit limit on your secured card, you will need to deposit more money.

Credit card issuers will refund your security deposit when you close the account, unless you default on payments. Because lenders can keep your deposit if you default, they view secured credit cards as less risky, so people with bad credit or no credit may find it easier to qualify.^[1]

Secured cards work differently from debit cards. Debit cards use money from your bank account when you make a transaction. With secured credit cards, you provide an up-front cash security deposit that acts as collateral. Your credit limit is typically equal to that deposit amount.

How to build credit with a secured credit card

If you’re having trouble qualifying for an unsecured credit card, you may want to apply for a secured card. Often available to people with poor credit, secured credit cards offer a great starting point to build or rebuild credit. The following tips may help you maximize the benefits of secured credit cards.

1. Choose the right secured credit card

Start by choosing a secured credit card that best suits your needs. You may want to ask yourself the following questions to help select the best secured credit card^[2] for you:

• Are there any hidden fees? Some cards may come with annual fees, cash advance fees, monthly maintenance fees or other charges. While you can’t avoid transaction fees that merchants charge just for paying with a card — secured or unsecured — don’t hit the “apply now” button before you research the related fees. Also look to avoid cards with exorbitant interest rates.

• Does the card report to all three credit bureaus? Secured credit cards only help your credit if they show up on your credit reports. So to make the most of your secured credit card, check to make sure that the lender reports to the three major credit bureaus.

• Do they provide an affordable deposit? You can only open a secured credit card if you have the money in your bank account and can afford to use it for the minimum security deposit. On the other hand, to avoid maxing out your card, also think carefully about going too low with your initial cash deposit.

• Is there a way to upgrade? Some credit card companies allow you to increase your credit limit or even upgrade to an unsecured credit card after a certain number of on-time payments.

2. Pay the deposit

Once you have chosen a secured card, you can open your account providing the refundable security deposit. Lenders ask for a security deposit for a credit card as part of the application process and may approve you immediately. Secured credit cards generally allow cardholders to select a credit limit ranging from $50 to $300. The Self Visa® Credit Card permits a minimum limit of $100 and a maximum of $3,000.^[2]

3. Make on-time payments

Be sure to pay your statement balance in full by the due date each month. Not only will that help you avoid late fees and interest charges, but it can also positively impact your credit score. In fact, payment history makes up the single largest portion of your FICO® score (35%). A history of on-time payments can go a long way towards showing lenders and potential lenders that you manage your finances responsibly.^[3]

4. Keep your credit utilization ratio low

Your credit utilization ratio divides your total credit balance by the amount of available credit you have. To maintain a good credit score, consider keeping your credit utilization rate low. In fact, how much you owe on your accounts is the second-largest portion (30%) of your FICO® score. Having a high credit utilization ratio may negatively impact your credit score.^[4]

5. Monitor your credit score and activity

To keep tabs on your credit-building efforts, you may want to regularly monitor your credit activity. Requesting a credit report allows you to ensure that lenders are reporting your payments to the major credit bureaus. Federal law entitles you to a free credit report every 12 months from each of the credit reporting agencies, which you can access by visiting annualcreditreport.com or you can pay a small fee (no more than $13.50) for a report directly from the bureaus (Experian, Equifax and TransUnion).

6. Upgrade to an unsecured credit card

Some cards allow the perk of graduating from a secured credit card to an unsecured credit card. You may upgrade to a partially unsecured card when the card issuer increases your credit limit above your initial security deposit. You may even qualify to receive a fully unsecured traditional credit card and the company will refund your security deposit.^[2]

How much will a secured credit card raise my score?

You may wonder how much a secured credit card will raise your score. Every individual case differs, so no one can offer an exact number. However, to improve your credit score, you may wish to take a closer look at the following factors:

• Payment history: Paying your credit card on time can heavily influence your credit score, as payment history makes up over a third of your total score.

• Amounts owed: The next largest factor in your credit score, the total amounts you owe on your accounts can indicate your responsible use of credit. This factor includes the calculation of your credit utilization ratio (CUR), which refers to your total revolving balances divided by your total revolving credit limits. Your CUR gives clues to lenders as to how well you manage revolving debt.

• Length of credit history: While a high credit score doesn’t require a long credit history, it can help. Your credit score takes into account the age of your oldest account, your newest account and the average age of all of your accounts.

• Credit mix: FICO® scores consider your mix of credit types, such as revolving credit and installment loans. While you don’t need to open new types of accounts just to diversify your credit mix, if you were wanting to obtain a secured credit card and don’t have a revolving credit account, opening a secured credit card can help add to your credit mix.

• New credit: The potential value of opening a secured credit card account should be balanced against the potential drawbacks of opening too many new accounts at once. Lenders may consider opening several new accounts in a short period an indication of greater risk, especially for people with a limited credit history.^[5]

How fast can a secured credit card build your credit score?

Building and rebuilding credit requires time, patience and consistency. How long it takes to see a bump in your credit score depends on your individual credit history. While you may hope for a quick path to good credit, know that you can take proactive steps with a secured credit card to work on positively impacting your score. Manage your credit responsibly, keep card balances low, pay attention to due dates to avoid making late payments and remember to check your credit report regularly.^[6]

Consider the secured Self Visa® Credit Card

Now that you know how a secured credit card works, you may want to try one for yourself. The secured Self Visa® Credit Card makes it easy. All you need is an active credit builder account in good standing, $100 or more in savings, and three on-time monthly payments. (Requirements are subject to change.) Eligible Self Credit Builder Account customers can order the card today — no credit check required.

Disclaimer: FICO is a registered trademark of Fair Issac Corporation in the United States and other countries.

Sources

1. Experian. “What Is an Unsecured Credit Card?”
   https://www.experian.com/blogs/ask-experian/what-is-unsecured-credit-card. Accessed on July 30, 2022.
2. MyFICO. “What Should You Look for in a Secured Credit Card?” https://www.myfico.com/credit-education/blog/secured-credit-card-tips. Accessed on July 30, 2022.
3. MyFICO. “What is Payment History?” https://www.myfico.com/credit-education/credit-scores/payment-history. Accessed on July 30, 2022.
4. MyFICO. “What Should My Credit Utilization Ratio Be?” https://www.myfico.com/credit-education/blog/credit-utilization-be. Accessed on July 30, 2022.
5. MyFICO. “What's in my FICO® Scores?” https://www.myfico.com/credit-education/whats-in-your-credit-score. Accessed on July 30, 2022.
6. MyFICO. “How to repair your credit and improve your FICO® Scores.” https://www.myfico.com/credit-education/improve-your-credit-score. Accessed on July 30, 2022.

About the author

Ana Gonzalez-Ribeiro, MBA, AFC® is an Accredited Financial Counselor® and a Bilingual Personal Finance Writer and Educator dedicated to helping populations that need financial literacy and counseling. Her informative articles have been published in various news outlets and websites including Huffington Post, Fidelity, Fox Business News, MSN and Yahoo Finance. She also founded the personal financial and motivational site www.AcetheJourney.com and translated into Spanish the book, Financial Advice for Blue Collar America by Kathryn B. Hauer, CFP. Ana teaches Spanish or English personal finance courses on behalf of the W!SE (Working In Support of Education) program has taught workshops for nonprofits in NYC.

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