How to Use a Secured Credit Card and Build Credit

How to Use a Secured Credit Card
Key Takeaways:
  • A secured credit card is a useful tool for establishing or rebuilding credit in as little as six months.
  • A secured credit card requires an initial cash deposit, but you can get your money back.
  • After a few months of responsible use, you can apply for a traditional credit card.

A secured credit card serves as a stepping stone as you work toward improving your credit score. You can use one to build credit or to recover from damaged credit. 

What is a secured credit card?

A secured credit card looks and works like any other credit card. You can use it to make purchases that you pay for later. If you don’t pay off your entire balance by your payment due date, you'll pay interest on the unpaid balance. The key difference is that you need to make a cash deposit to get a secured card. 

With traditional credit cards, the lender is trusting you to pay the money you owe. It doesn’t take long to build this trust. In the meantime, if the lender isn’t sure whether you’ll pay your debt, because your credit score is low or you haven’t established a credit history yet, a cash deposit lowers their risk. 

How to choose a secured credit card

Secured credit cards come with varying fees and terms, so take the time to compare different options to find one that best fits your needs.

Fees you might notice include an annual or monthly fee, application fees, inactivity fees, statement fees, membership fees, and so on. Many secured card options don't have these fees, so those are the ones to look for. 

You also want to be aware of the APR (annual percentage rate), which tells you how much interest you'll pay if you carry a balance. Interest is an additional cost that the creditor will charge you if you don’t pay off your balance in full each month. If you don’t pay off your balance, interest makes your transactions more expensive. You can avoid interest altogether by paying off your balance each month in full.

If you want to build a good credit score, it’s important to apply for a secured credit card that reports your balance and payment history to the credit bureaus, Equifax, Experian, and TransUnion (all three if possible). If they don't report, then having the card won’t help you build credit.

How to apply for a secured credit card

Most secured credit cards will take your application online. You’ll provide identifying information. Some creditors will check your credit, but others don't. 

Once your application is approved, here’s what happens:

Send in your deposit

The lender will give you instructions for sending in your security deposit. Usually, you can do this by linking your bank account online. There may also be an option to mail a money order.

The security deposit amount can vary depending on the issuer. Sometimes, the amount of your security deposit will be your credit limit. However, some lenders allow a credit limit that's higher than the amount of your deposit. 

Pay on time and in full

Achieving financial success starts with responsible credit card habits. Life can get busy, but a strong credit score will help you achieve your financial goals in the future, so focus on making on-time payments. Your payment history is the most important factor in your credit score. Commit to paying in full each month.

Use a secured credit card sparingly

Though you may have the power to make purchases anywhere at any time with a secured credit card, it doesn't mean you should. Use a secured credit card with caution. Stay in control and only spend within your means. Don’t use a credit card to buy something you can’t afford. If you can’t pay off your balance every month, it may be a sign that you're spending too much on the card.

Never max out your card. In fact, don’t even come close. Utilization is the amount you owe compared to your credit limit. If your limit is $300 and you owe $270, your utilization is 90%. Utilization is the second most important factor affecting your credit score, right behind payment history. The best utilization is zero. One way to keep it low even if you use your card regularly is to make payments more than once a month. 

When do you graduate from your secured card?

After a period of use and on-time payments, some banks will convert your account to an unsecured credit card automatically and return your deposit. If your credit card issuer doesn’t do this, you may be able to apply for an unsecured card after 6 to 12 months of on-time payments. 

At that time, look for a starter card. They’re easier to get approved for. Capital One and Discover are known for traditional (unsecured) credit cards that are designed for students and others with limited credit history. Once you get an unsecured card, you can close your secured credit card account and request the return of your deposit. You’ll need to pay off any outstanding balance first.

Pros and cons of secured credit cards

Secured credit cards can be a great option if you're looking for a way to get your credit score on the right track and establish a good credit history. There are some amazing potential benefits of using one. These include:

  • Secured cards are an effective way to build or rebuild your credit history and credit score

  • Almost anyone can get a secured card 

  • With on-time payments, you can graduate to an unsecured card in a matter of months

Secured credit cards aren't without their downsides. These include:

  • You'll need to put down a security deposit

  • Some secured cards have fees 

  • Secured cards tend to have low credit limits

Frequently Asked Questions

How fast will a secured card build credit?

Obtaining a secured credit card can help you establish credit in months. However, it may take longer to maintain and improve your credit rating. A positive credit history is built over time.

If you’re just getting started with credit, getting a credit score requires at least one open account, and the account must be open for at least six months.

If you’re recovering from credit damage, your most recent activity is more important than older activity.Maintaining control of your account is key. Once you open a secured credit card, reporting takes place right away. Don’t miss even a single payment.

Your secured card will be reported as soon as it's open, and the payment history will be reported starting with the first month. As soon as you make your first on-time payment, you’re establishing positive credit history. 

The account is going to be reported as brand new, of course, and account age is a factor. Older is better. As your account ages, your score should improve. Even if you close the account and open a traditional credit card after 6-12 months, you’ll still get the benefit of account age. Accounts closed in good standing stay on your credit report for ten years.

Do all secured credit cards report to credit bureaus?

Not all secured cards report to the credit bureaus, so be sure to choose one that does. Otherwise, you won’t build credit.

How much should I spend on a $200 limit?

If your limit is $200, don’t charge more than $50 or $60. You might want to set a small bill to be paid automatically with your card, and then set your card to be paid off automatically from your bank account. That way you get the positive payment history without any debt.

Limiting your use of the card is the smart thing to do. Spending modestly and paying off the balance in full will help you build solid credit, which will open up doors in the future. When it comes time to buy a car or a home, having good credit can improve your chances of approval and lower your costs. Knowing that you can access credit on good terms can provide you with peace of mind as you plan your financial future.