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How to build credit with a secured card

When used responsibly, a secured card is one of the easiest ways to establish credit.

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If you have no credit or less than perfect credit, you might feel discouraged when applying for a credit card. Traditional routes to build credit may seem blocked or littered with obstacles. However, there are still sensible ways to build credit even when your credit file is thin or rocky -- using a secured card is one of them. 

Here's what you need to know about building credit with a secured card and how it can help bolster your credit. 

What is a secured card and how does it work? 

A secured card is an option for people who are working to establish or rebuild their credit. Just like a standard credit card, a secured card is a revolving line of credit that can be used for pretty much any type of purchase. In other words, you have a credit limit, can spend when and how you please and must pay back what you spend before your credit limit climbs back up.  

Secured cards are different from standard credit cards in that they require a security deposit. Most secured cards require you to provide a deposit for the full credit line upfront. For instance, if your deposit is $250, your credit line is $250. If you front $500, your credit line will also be $500. If you show responsible habits, such as making on-time payments, your security deposit will be refunded after a set amount of time. 

A common misperception about secured cards is that "secured" means that these cards are secure or safe in some way for the user, says Rod Griffin, senior director of consumer education and advocacy at credit reporting company Experian. It turns out that "secured" actually is from the perspective of the lender issuing the card.

"The savings account tied to the credit card protects the bank from loss," Griffin says. "If you don't pay the bill as agreed, it doesn't protect you from loss or negative impacts on your credit history." 

Should you miss a payment, the lender will still report the account as late but can recover the loss by taking money from your security deposit. 

How to use a secured card to build credit

Here are the steps to find and use a secured card: 

Choose the right secured card

When shopping for a secured card, you'll want to look at the credit limits and security deposit requirements. And just like when you're hunting for a standard credit card, the APR and fees should also be taken into account. The fees include annual fees and miscellaneous charges such as late or returned payment fees. 

On top of your deposit, some secured cards will ask for a fee when opening your account. "Shopping around for the best rates and terms can help you save money in the long run," says Griffin. 

You'll also want to see if a card offers you the option to upgrade to a traditional credit card or if it will increase your credit limit at some point. To qualify, you usually need to demonstrate responsible financial habits and have your card open and active for a set amount of time.  

Make sure your account activity is being reported 

You want to be sure the lender or card issuer will report your account activity to the credit bureaus, Griffin says. While most issuers do so, it's a good idea to check.

"While having a secured credit card can be a useful way to build credit, it will only impact your credit history and credit scores if the information is included on your credit report," Griffin says. 

Fund the deposit

Many secured cards require the deposit to be paid right after approval, so don't apply until you have this money saved up. To err on the safe side, choose a card with a security deposit and credit line well within the range of what you can comfortably afford. 

Pay off your balance in full each month 

The best way to use a secured credit card is to do so responsibly. To avoid paying interest, pay off your balance in full each month. Doing so also keeps your credit utilization rate, or the amount of available credit you're using, low, Griffin says. 

"Your utilization rate, or balance-to-limit ratio, is the second most important factor in credit scores after payment history," Griffin says. "The lower your utilization, the better, as it shows you're not relying too heavily on your available credit."

Because it's important to show activity on your card, consider using the card for small purchases and pay them off that month. Or you can use your card to pay for a small, recurring bill, such as a streaming subscription service. 

Don't max out your card 

Remember that the point of getting a secured card is to build your credit and practice responsible financial habits. Maxing out your card will do two things: bump up your credit utilization rate and make it harder to keep up with your card payments. 

Keep an eye on your credit score

After you open and use your secured card, keep tabs on your credit score. You can sign up for a free credit monitoring service, or you can order one for free at AnnualCreditReport.com. These credit reports, which are usually offered for free once a year, are free once a week until April 20, 2022. 

Here's what you should look out for when reviewing your credit report: 

  • If all payments are being reported correctly
  • If payment history is accurate 
  • How much credit you're using (aka credit utilization) 

Apply for an traditional card 

As secured cards are a stepping stone to unsecured (i.e., standard) credit cards, you should consider applying for an traditional card after you've been practicing solid credit-building habits: keeping your credit use low, making on-time payments and ideally paying your balance in full each month. 

Once your credit score hits the 580 mark, which is the FICO threshold for fair credit, you'll be eligible to apply for an unsecured credit card. The selection of standard credit cards available to people with fair or average credit ratings is somewhat limited and many have high APRs and fees. Thus, you might want to apply for an unsecured card with a low credit limit and then continue practicing solid habits. 

FAQs

How soon will a secured card raise my credit score?

Typically, it can take one to two months after you begin using your secured card for it to start bumping up your score. According to Experian, if you're brand new to building credit, it could take up to six months for a credit score to even show up on your report. 

Can applying for a secured card hurt my credit?

When you apply for a secured card, the issuer might perform a hard credit pull, which could ding your credit. However, not all secured cards do a hard credit pull, and a few don't do a credit check at all. 

What credit score is needed for a secured credit card?

Each credit card issuer has different criteria for offering a secured card, but the good news is that secured cards have lower credit score requirements than most traditional credit cards. Some don't have a credit score requirement, while others do. Depending on the card you're applying for, other financial criteria such as your cash flow and income might be considered.