Key takeaways
- A secured credit card requires you to put down a deposit that will mitigate the risk that you will not make your payment
- These cards typically come with low credit lines and high interest rates
- Once you use a secured card credit card to build up your credit, you could move up to an unsecured card that might offer a higher credit limit
If you have bad credit, you’re probably looking for ways to build your credit as quickly as possible. Using a secured credit card to build credit is something to consider.
Secured credit cards provide you with a small line of credit in exchange for an affordable, refundable security deposit. Secured cards are one of the best ways to build credit if you have a low credit score or a limited credit history. But you have to know how to use a secured credit card to build credit if you want to get the most out of these credit-boosting tools.
How do you build credit using a secured card — and how quickly can you do it? Let’s take a look at how secured credit cards work, how you can use one to raise your credit score and how to choose the best secured credit card for your financial situation.
What is a secured credit card?
A secured credit card offers many of the benefits and protections of a standard credit card — but you have to put down a security deposit first. Why? Well, if you have poor credit or a limited credit history, lenders might wonder if you are going to be a risky borrower. Putting down a security deposit gives your lender some protection in case you default on your credit obligations. If you manage your line of credit responsibly, you’ll get your security deposit refunded in full.
How much will your security deposit be? It depends. Some secured credit cards allow you to open a line of credit after making a deposit of less than $50. However, most cards require you to match your credit line with an equivalent deposit — so if you want a $500 line of credit, for example, you’ll need to pay a $500 deposit. This is one factor to keep in mind as you decide which secured credit card is best for you.
People often use secured credit cards as a way to build their credit scores. In most cases, secured cards come with low credit limits and high interest rates. This makes it difficult to use secured credit cards to finance large purchases — and very expensive if you decide to carry a balance.
How to use a secured credit card to build credit
Do secured credit cards build credit? Yes, depending on how you use them. If you want to know how to build credit with a secured card, you’re going to need to understand the fundamentals of building good credit: making on-time payments, keeping your balances low and paying off your debts.
Building credit with a secured credit card is all about practicing those three habits. Use your secured card to make small everyday purchases and pay your statement balance in full every month. Avoid maxing out your credit card and try to pay down any debts you had before you took out your secured card. The more work you put into actively building your credit, the faster you’ll achieve a good credit score.
How much will a secured credit card raise my score?
How much will a secured credit card raise your score? While we can’t say for sure how much your credit score might improve, we can tell you that using a secured card can boost your credit score relatively quickly — think “under six months” — especially if you focus on the five factors that make up your credit score:
- Payment history
- Credit utilization
- Length of credit history
- Credit mix
- New credit
If you want to start building credit with a secured card, make on-time payments every month. Maintain a good credit utilization ratio by keeping your debts low and paying off your balances. Avoid unnecessary hard credit inquiries that can lower your credit score. As your credit improves, so will your length of credit history — and as you become eligible for more lines of credit, you’ll be able to build the credit mix that might someday help you earn a perfect credit score.
When to upgrade to an unsecured credit card
When should you switch from a secured credit card to an unsecured credit card? In some cases, your credit card issuer will automatically transition you to an unsecured credit card after you’ve proven you can use your secured credit card responsibly. If you have the Discover it® Secured Credit Card, for example, it’s possible to graduate to an unsecured Discover card with just seven months of good payment behavior. When a credit issuer upgrades you from a secured card to an unsecured card, your security deposit will be refunded — and you may even receive a higher line of credit.
In other cases, you’ll need to close out your secured credit card before you can receive your security deposit back, and you may need to apply for an unsecured credit card on your own. Read the fine print before you apply for a secured credit card to learn exactly what the rules are regarding security deposit refunds and graduating to an unsecured card.
If your credit card issuer doesn’t automatically consider you for an unsecured credit card, how do you know when it’s time to apply for one on your own? Start by getting at least six months of positive credit habits under your belt. Check your credit score on a regular basis to ensure it’s moving in the right direction and review your credit report to make sure all of the information is accurate.
If your credit history has improved, it might be worth applying for one of the best credit cards for people with bad credit — or, depending on your new credit score, one of the best credit cards for people with fair credit.
The bottom line
Building credit with a secured credit card is an important step in getting your finances back on track. Use these tips to help you establish a positive credit history, transition to an unsecured credit card and work your way toward all of the benefits that good credit has to offer.
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