How to Use a Secured Credit Card Responsibly

By Jackie Lam
February 24, 2020

 

 

 

 

Have less-than-awesome credit? If this is the case, perhaps you avoid credit cards and loans altogether. 

Why? Just like someone who has been burned in the dating scene, if you apply for a credit card, you may get rejected. And if your application is accepted, you may get stuck with unfavorable terms and rates. 

But there is some good news. There are legit, relatively easy ways to build credit. One of those ways is to get a secured credit card. 

In this guide, we’ll explain what a secured card is and why it’s super important to use it wisely. We’ll also outline the potential consequences if you don’t use your secured credit card responsibly. 

What is a secured credit card? 

When you get a secured credit you’ll generally be required to pony up cash as a form of collateral. This collateral serves as a form of backup in case you have trouble paying back the balance. 

The limit on your credit varies, and it usually matches your deposit amount. So, if you drop $200 for your deposit, $200 is generally your credit limit. If you start with $300 as your deposit? Then that amount is usually the spending limit on your card. 

Other than that, you use a secured credit card the same way you’d use a regular credit card. 

Why is it important to use a secured credit card responsibly? 

If you’re starting to rebuild your credit, using a secured credit card wisely will show lenders that you can use credit responsibly. For this reason, a secured card can be a good option if you’re looking for ways to build credit

And, when you use credit wisely, it can boost your credit score

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 can incur a late fee. If you don’t use a secured credit card responsibly and make your payments on time, you can also get dinged with hefty late fees and penalties. 

Once you’re 30 days late on a payment, this can be reported to the credit bureaus. No bueno, right? 

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.

3 Ways to use a secured credit card responsibly

If you don’t use your secured credit card responsibly, you can dig yourself into debt. Or, you may harm your credit score. To avoid this, try following these three important tips:

  1. Always make the minimum payment. As payment history makes up the bulk of your credit score — 35%, to be exact — this takes top priority. “Secured card issuers report delinquencies to the credit bureaus, just like unsecured card issuers,” says credit expert John Ulzheimer.  “Just because you paid a deposit doesn’t mean you don’t have to make your required payments.”  If you anticipate having trouble making on-time payments, see if you can shift the due date so it’s more in sync with your cash flow.  Another thing you might consider doing? Lowering your limit. This way you’re not tempted to spend more than you can reasonably handle.
  2. Know the fees. Be in the know of all the fees you might get dinged with—annual fees, late fees, returned payment fees, and cash advance fees. And that’s just for starters.
  3. Pay off your balance and be mindful of your credit score. If you can pull it off, aim to pay off your balance in full each month.  But, if you carry a balance, make sure it’s as low as possible.  “If you care about the card’s impact on your credit scores, then you’ll want to maintain a balance that’s no more than 10% of the limit,” says Ulzheimer. And as Ulzheimer points out: Because secured card limits are notoriously low, the card can be easily maxed out or heavily leveraged. In turn, this can be horrible for your credit scores.  If it’s the only credit card you have, and your limit is $500, then you won’t want to put more than $50 on the card. A major downside to secured cards? You bet.  “This will likely severely limit the ability for you to use the card,” he says.

Did you know that Chime's Credit Builder card has no fees, 0% APR and does not require minimum security deposit?

Make sure your card activity is reported to the credit bureaus

A secured credit card can help improve your credit – but only if the credit bureaus are tracking your card activity. So, make sure your card activity is reported to all three of the credit bureaus—TransUnion, Equifax, and Experian.

While you’re at it, order a credit report. You can order one for free at each of the three bureaus every 12 months. 

And, remember this: A secured credit card can help improve your credit – if you use it responsibly. 

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Jackie Lam is an L.A.-based financial writer whose clients include Fortune 500 companies and FinTech startups. Her work has appeared in Forbes, Business Insider, and GOOD.

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