How To Use Secured Credit Cards To Build Credit

With a traditional credit card, the issuer sets your credit limit based on your credit history and score.

Secured credit cards work differently. Your credit limit is typically based on a cash deposit you make when you open the account. For example, if you deposit $200, your credit limit is $200.

This deposit acts as collateral (or an insurance policy) for the card issuer – they can keep the money if you fail to repay what you borrow. Card issuers will often approve secured credit cards for customers with no credit history or low credit scores because of this added security.

When you’re approved for a secured credit card, you’ll put down a cash deposit to serve as collateral. Generally, your deposit amount sets your credit limit. For example, a $200 deposit typically means you get a $200 credit limit.

Otherwise, a secured credit card works just like a traditional one. You can use it to pay for goods and services, then pay off your balance each month. If you only make the minimum payment each month, you’ll incur interest and increase the amount you owe.

Just like any other card, your issuer will report your activity to the three major credit bureaus (Equifax, Experian, and TransUnion). With repeated responsible use, you can build credit and boost your score. But if you frequently miss payments, it can negatively impact your credit score.

Remember: You probably signed up for a secured credit card to boost your credit score, not deflate it. So, make sure you use a secured credit card responsibly.

Responsible use of your secured credit card can help you build credit. Here’s how you can boost your credit score with this card type.

1. Shop around for the right card

Not all secured credit cards are created equal, so it’s essential to do your research and find one that best suits your needs. Consider the following during your search:

• Reporting: Make sure the card you’re considering reports to all three major credit bureaus. This is essential in boosting your credit score.
• Fees: Review the card’s fees and interest rates to ensure you won’t incur additional debt while using your secured credit card.
• Grace period: By law, credit card companies must give customers at least 21 days between mailing their statement and their due date.¹ Check to see how long the credit card’s grace period is.
• Security deposit: Review the card’s security deposit options to ensure they work for your budget. Secured credit cards typically require at least a $200 deposit.²
• Upgrade potential: See whether the card issuer will let you upgrade to an unsecured credit card after several months of on-time payments.

2. Make your deposit

Once you’ve chosen a card and applied, have your deposit ready to open the account. This might mean saving the deposit amount before applying for the card to ensure your application doesn’t expire.

Depending on the credit card company, you might be able to make your deposit online, over the phone, or by mail.

3. Use the card regularly

The whole point of getting a secured credit card is to use it. Plan to pay for everyday items – like groceries, gas, and subscriptions – with your secured card. The more you use it, the quicker you’ll notice a boost to your credit score.

4. Pay on time

Just like any other credit card, you have to make the minimum payment on your balance by the due date. If you don’t pay on time, you may incur a late fee. And if you fail to pay at all, you might lose your security deposit and hurt your credit score.

Payment history makes up 35% of your FICO^® Score, making it the most critical factor in boosting your credit.³ Your card issuer will report your payments to the credit bureaus – on-time payments should boost your credit score, while missed payments will hurt it.

Set up reminders or automatic payments to ensure you never miss a payment. And aim to pay off your balance each month to avoid interest charges.

5. Keep a low balance

Credit cards are meant to be used, but if you overuse your card or maintain a high balance, you can harm your credit score. The amount of money you owe on your credit cards makes up 30% of your FICO Score.³

Keep your credit utilization ratio low by making small purchases on your card and paying them off each month. This ensures you’re positively impacting your credit score rather than hurting it.

6. Monitor your credit score and report

Keeping tabs on your credit score not only helps you catch and dispute potential issues but can also be motivating. Seeing the results of your hard work in real-time encourages you to keep going.

You can check your credit report once a week for free on AnnualCreditReport.com.⁴ Many financial institutions and credit card companies offer free credit score monitoring, which makes it easier to stay on top of your credit health.

7. Upgrade to an unsecured card

Once you’ve spent several months using your secured credit card responsibly, you might be able to upgrade to an unsecured card. The time that it takes varies, but you could qualify for an unsecured card after six to 12 months.⁵

If your credit card issuer doesn’t offer an unsecured card, you can apply for one with a different company instead. The higher your credit score, the better terms you’ll likely be offered.

A secured credit card can impact your credit in several ways. To fully understand, let’s look at the factors that make up your FICO Score.^3,6

As you practice good credit habits (like making on-time payments and keeping a low balance), you should notice an increase in your credit score. Over time, using your secured credit card will also lengthen your credit history.

As you use the card, the issuer will report your payments to tde credit bureaus. Your credit score updates whenever lenders report new information, which is typically once a month.⁷

Don’t let the hard work stop once you’ve established or boosted your credit score. You can maintain a good score – and potentially even reach an 850 credit score – by continuing to practice responsible credit card usage.

Responsible use of a secured credit card can pay off in a big way. By positively impacting your credit score, you can open the door to better loan terms and credit card rates and reach your financial goals.

As you build your credit, it’s helpful to know how to read a credit report so you can track your progress and understand your financial standing.