Applying for an unsecured credit card -- a credit card that doesn’t require a security deposit -- comes with some tough requirements. Credit card issuers check your income, credit history, credit score and other approval factors. If you have no credit or have made some credit mistakes in the past, you might feel discouraged about applying for a credit card. In this case, a secured credit card may come in handy.
Secured credit cards don’t come with the frills of rewards and perks, but they offer a low-risk way to improve your credit with minimal requirements. Some credit card issuers will even consider “graduating” you to a traditional rewards credit card and refunding your security deposit over time. Here’s what you need to know about building credit with a secured card and how it can help bolster your credit score.
What is a secured card, and how does it work?
A secured card offers an easier path to credit approval. The big difference between secured and traditional credit cards is that secured credit cards require a security deposit, which often serves as your credit limit. For instance, if your deposit is $250, your credit line will also generally be $250. You can usually increase your limit by depositing more funds.
A common misperception about secured cards is that “secured” means that these cards are secure or safe in some way for the user, said Rod Griffin, senior director of consumer education and advocacy at credit reporting company Experian. But the money you’re using to secure your credit line protects the bank, not you, in case you can’t pay your bill, Griffin said. “If you don’t pay the bill as agreed, it doesn’t protect you from loss or negative impacts on your credit history.”
Like a standard credit card, you can use a secured card to purchase. Most secured cards report your activity to the three major credit bureaus -- Experian, TransUnion and Equifax -- so you can build up your credit profile.
“FICO scores consider secured cards the same way as unsecured credit cards,” said Tommy Lee, Senior Director of Scores and Analytics at FICO. But this works both ways -- if you miss a payment, it will reflect negatively on your credit report and can drag down your score.
“By monitoring your credit score regularly, you can get a sense of how your credit activity is impacting your score over time,” said Bryan Perez, founder of the Credit Advisors Group, a credit repair company in Altamonte Springs, Florida.
If you show responsible habits, such as making on-time payments, the card issuer may consider refunding your security deposit and upgrading you to an unsecured credit card that may come with rewards.
Who is a secured card best for?
“Secured credit cards are a good option for individuals who are new to credit or have poor credit,” said Perez. “If you have a low credit score, limited credit history or have experienced financial difficulties in the past, you may find it difficult to get approved for a traditional unsecured credit card.”
Most rewards credit cards require a credit score of 670 or better. If your credit score or history is less than ideal to qualify for these cards, a secured credit card will still require a hard credit inquiry but comes with fewer approval requirements to better your chances. Or if you’re new to building credit, a secured credit card can help you establish a positive credit history, said Perez.
How to use a secured card to build credit
Most credit card issuers offer secured credit cards with similar options and features. However, some might let you earn rewards or a welcome bonus. Here’s how to use a secured card as a tool to improve your credit:
1. Compare secured cards to find the right option for you
When shopping for a secured card, you’ll want to consider the cards limits, fees, benefits, credit-reporting features and some other key factors.
First, look at the secured card’s credit limit and security deposit requirements. Since you’ll likely need to fund the card right away, make sure you can afford the deposit. And just like when you’re hunting for a standard credit card, you should also take the card’s APR and fees, including any annual fees or late payment fees, into account.
On top of your deposit, some secured cards will ask for a fee when opening your account. Compare fees across multiple card providers. “Shopping around for the best rates and terms can help you save money in the long run,” said Griffin.
Some secured cards come with robust credit tools to help you stay on track and may even offer the opportunity to earn rewards. But just because a secured card offers rewards doesn’t make it the right choice for you. If you’re tempted to overspend to earn rewards, for example, it might be better to start with a basic secured card that can help you build healthy credit habits instead.
It’s also important to make sure your card issuer will report your account activity to the credit bureaus, Griffin said. While most issuers do so, it’s a good idea to check, since it will only affect your credit history and credit scores if the information is included on your credit report, according to Griffin.
Lee echoed Griffin’s thoughts and added that if a card you’re considering doesn’t openly state its credit reporting policy, contact the card company to confirm that the credit bureaus will receive reports on your credit card activity.
Lastly, you may want to see if the secured card you’re looking at offers the option to upgrade to a traditional credit card or if it will increase your credit limit down the line.
2. Limit your card applications
It’s also a good idea to find one card that will suit your needs rather than applying for multiple secured cards. Even if you’re approved for all of them, this could hurt your credit.
“Opening several new accounts in a short period of time will lower the average age of your accounts,” said Lee. This can cause your credit score to drop slightly. And lenders might view rapidly opening accounts when you’re new to building credit as risky behavior, even if those credit cards are secured cards.
If you’re not sure if you’ll be approved for a secured credit card, most card issuers offer some form of preapproval that lets you check your chances of approval without harming your credit score before officially applying.
3. Fund the deposit
Many secured cards require you to pay the deposit 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.
And, if you apply for a secured card with any additional upfront fees, be ready to pay these right away (though some fees may be pulled directly from your credit line).
4. Start using your secured card responsibly
Now it’s time to start using your secured card to grow your credit. Here are some tips:
To avoid paying interest and grow your credit score, make sure you only charge what you can afford to pay off each month. Doing this helps build a positive payment history -- one factor that goes into your credit score calculation -- and it also keeps your credit utilization rate, or the amount of available credit you’re using, low. Your credit utilization rate refers to the debt you carry versus the amount of credit you have access to. The less debt you carry, the lower your credit utilization rate.
“Your utilization rate, or balance-to-limit ratio, is the second most important factor in credit scores after payment history,” Griffin said. “The lower your utilization, the better, as it shows you’re not relying too heavily on your available credit.”
It’s also important to show activity on your card, so consider using the card for small purchases and paying them off that month. Or you can use your card to pay for a small, recurring bill, such as a streaming subscription service.
5. 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 -- or spending up to your credit limit -- will do two things: bump up your credit utilization rate, which hurts your credit score, and make it harder to keep up with your card payments.
6. 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 the end of 2023.
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 (also known as credit utilization)
7. Apply for a traditional card
Secured cards are a stepping stone to unsecured (or standard) credit cards. After demonstrating a pattern of responsible use, you should consider applying for a traditional credit card.
“Keep an eye out for those that offer graduation paths,” said Lee. “These cards will allow you to graduate to a partially unsecured or fully unsecured card after you make a specific number of on-time payments. On the other hand, some secured cards do not offer graduation paths and could make you close your account to get back your security deposit.”
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, though you may want to wait until your score is in the 600s to begin applying for other cards. 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. It may make sense to apply for an unsecured card with a low credit limit and then continue practicing solid habits.
How soon will a secured card raise my credit score?
It can take one to two months after you begin using your secured card to notice a bump in your credit score. And, 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, according to Experian.
Can applying for a secured card hurt my credit?
However, not all secured cards pull your credit. If your secured card provider does perform a hard credit check, you may notice your credit score dip slightly. This is normal and happens whenever a creditor makes a hard-pull on your credit. Your credit score should then start to increase as you make payments in full and on-time.
What credit score is needed for a secured credit card?
Each credit card issuer has different requirements to approve you for a secured card. But secured cards typically have lower credit score requirements than most traditional credit cards -- and some don’t have any credit score requirements for approval. Depending on the card you’re applying for, other financial criteria, such as your cash flow and income, might be considered.
The bottom line
A secured credit card isn’t the only way to build or repair your credit, but it may be the most practical and affordable. You’ll have the flexibility to increase your credit limit when you want to add more money, and you can use the card to make purchases, just like any other unsecured card.
However, if you need to pay off credit card debt to get on the right path to better credit, it’s best to pay off your debt first to avoid paying more in interest and lower your credit utilization ratio. Take a look at your credit report to see what other changes you can make to improve your credit history and maintain a good score before applying for any card or loan.
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