There’s an inherent frustration built into the process of building credit. The only way to build credit is to use credit, and you can’t get credit to use without a credit history. If you are stuck in this loop a secured credit card may be the tool you need to get out of it.
A secured credit card is a credit-building tool that’s accessible even with bad credit or no credit. Using a secured card wisely can put you on the road to a better credit score and better deals on financial services.
Don’t have time to read the whole guide right now?
What Is A Secured Credit Card?
A credit card allows you to borrow money. The card issuer wants to know if you can pay them back, so they check your credit record. If you have poor credit or no credit, they probably won’t approve you. The risk is too high for them to take.
A secured card removes that risk. When you apply for a secured card you put down a deposit. That deposit becomes your credit limit. If you fail to pay, the card issuer keeps your deposit. Because the risk is low, issuers will approve these cards for people with poor or no credit. Some secured cards don’t even require a credit check.
Once your card is issued, it’s just like any other credit card. It won’t say “secured” on it and nobody will know it’s a secured card. You will have a revolving credit account on your credit record.
Your card issuer will report your payments to the three major credit bureaus. If you make all your payments on time you’ll establish a good credit history
How Does A Secured Credit Card Work?
A secured card is very similar to any other card, but there are a few key differences. Here’s what you need to know.
When you apply for a secured credit card, most issuers will check your credit history. Some secured cards, like the OpenSky® Secured Visa®, don’t perform a credit check.
Submit Your Deposit
Once you are approved, you will submit your deposit. This deposit will become your initial credit limit. Some issuers will let you submit a deposit in installments.
Most secured cards require at least $200 for a deposit. Upper limits may range as high as $5000.
Your Secured Card is Issued
After you submit your deposit, your card will be issued and mailed to you. This process can take anywhere between 7 and 14 business days.
Use Your Card
Your secured credit card works just like any credit card. You can make purchases up to your credit limit. You will receive a monthly bill that tells you how much you owe and what your minimum payment is.
There are a few things you need to remember at this stage.
- Always pay on time. On-time payments are the most important factor in building credit.
- Pay your bill in full. If you pay your bill in full on or before the due date you will pay no interest. That’s a free loan from the issuer, a great deal. If you carry a balance to the next month, you will pay interest, usually at a high rate. That’s not a great deal.
- Never make the minimum payment. If you can’t make the full payment, try to pay more than the minimum. Making minimum payments is a sure route to the credit card debt trap.
- Use less than 30% of your credit limit. Less than that is even better. If your deposit (and your limit) is $200, keep your balance below $60. This keeps your credit utilization low and helps your credit score.
Here’s a sure strategy to help you build credit with a secured card.
- Choose a small recurring payment, like your internet bill or Netflix account. Put it on your card.
- Set up an automatic payment from your checking account to cover the bill. Be sure you have enough in your account on the billing date.
- Put your card away and forget about it.
If you do this, your card will be active, the bills will be paid on time, and the credit utilization will stay low. That helps you build credit.
Your Issuer Reports To All 3 Bureaus
Once your card is issued, you will have a revolving credit account on your credit record. Your card issuer will report your payments to the three major credit bureaus – Experian, Equifax, and TransUnion – every month. Every on-time payment helps you prove that you can manage credit. Keep your balance below 30% of your credit limit (10% is even better) and your record will be even better!
Don’t Expect Rewards
If you are building or rebuilding your credit, the only reward you’ll get is seeing your credit score increase. Very few secured cards offer the kind of rewards you see advertised for cards that require higher credit scores.
Don’t worry about rewards when you’re looking for a secured card. Focus on the basics: easy qualification, a low interest rate, and a low (ideally no) annual fee.
You’ll have a low credit limit on your secured card and you will only be using 30% or less of that limit, so you probably won’t be spending enough on your card to get significant rewards anyway.
Worry about rewards when you’ve established your credit and you qualify for conventional cards.
Know Your Interest Rate
Many secured cards carry high interest rates. Check the APR (annual percentage rate) on your card. It’s likely to be over 25%, which is high.
Remember that if you pay every bill in full on or before the due date, you’ll never pay a dime in interest no matter how high the rate is!
Watch the Fee
Many secured cards carry an annual fee, especially the ones that do not require a credit check. That’s a reasonable price to pay for building credit, but you won’t want to pay it forever.
Keep track of your credit. If you qualify for a no-fee deal, consider replacing or trying to upgrade your card.
Upgrade Your Card
Many secured card issuers will give you benefits if you make enough on-time payments. Some will increase your limit above your deposit. Others will upgrade your card from a secured card to a regular unsecured card.
If your card does not allow upgrades, you will have to apply for a second unsecured card. If your secured card has an annual fee you may want to close it. That will cut your credit history, which is not good for your credit, but it’s better than paying a fee for a card you don’t use.
Return Of Your Security Deposit
If you decide to close your account with a $0 balance, your issuer will refund your deposit in full. If you close the account with a balance, the amount owed will be taken out of your security deposit and any remaining funds will be sent back to you.
Who Are Secured Cards For?
Secured cards are not just for people with bad credit. Many people can benefit from the features of a secured card.
Student credit cards often have a minimum credit score. If you have no credit record, you’ll need a cosigner to get one. If you don’t have a cosigner available a secured card will help you start building credit.
Even if you have a student card, adding a secured card will put a second account on your record and build credit faster. Just don’t fall into the trap of spending more than you can afford to pay!
People With No Credit
Having no credit score doesn’t mean you’re financially irresponsible. It just means you don’t have enough credit history for a lender to judge your responsibility. If you have no credit history or not enough history to issue a score, a secure card can help you build the history you need.
Obtaining a credit card that is secured will be a great option for you if you have little to no credit.
The card will also allow you to start establishing and building credit.
People With Poor Credit
If your past mistakes have given you a poor credit score, think of a secured card as your second chance.
Rebuilding bad credit takes more time than building credit for the first time. The black marks will stay on your record for seven years from the first delinquent payment, but they will carry less weight as time passes.
Getting a secured card and using it wisely can help you rebuild.
How Fast Will the Secured Card Build Credit?
Your secured card tradeline will appear on your credit report the first time your issuer reports after your first payment. Most issuers report to the credit bureaus every month, but some may report quarterly or on other schedules.
Your new tradeline will affect your credit as soon as it is reported, but the actual impact is hard to predict. If you have a thin credit file with a small number of entries the change could be immediate and significant. If you already have many entries on your credit report the impact will be much smaller.
How long it takes to build credit will depend entirely on your personal credit accounts, but if you make all payments on time and keep your credit utilization low you should see significant progress in six months or less.
Pros & Cons Of A Secured Card
- Build Or Re-Build Credit
- Choose Your Own Credit Limit
- Very Easy Approval
- Reports To All 3 Credit Bureaus
- High Interest Rates
- Annual Fees
- Many Cards Can’t Upgrade
- You could hurt your credit if you dont manage your card well.
Secured vs. Unsecured Credit Cards
Let’s take a closer look at the differences between secured and unsecured cards.
- High APR
- May Have an Annual Fee
- Security Deposit Required
- Few or No Rewards
- Low or No Credit Score Is Acceptable
- May Have an Annual Fee
- APR Based On Your Credit
- No Security Deposit Required
- Rewards & Cash Back Programs
- Automatic Increases To Credit Limit
- Average to Good Credit Score Required
As you see from the above list, the two cards are similar in several ways and also have some very different features.
If you have been trying to build your credit or are in the process of rebuilding your credit, a secured card is one of the first steps toward recovery. Use it wisely and it will help you build credit.
It is time to build a credit score that opens doors!