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A secured credit card may help you build credit under the right conditions, especially if you can convert it to an unsecured card. Secured cards tend to be easier to qualify for than traditional credit cards, so they're a good option if you have trouble getting approved for credit elsewhere. Let's dive into what to expect as you work to build your credit history with a secured credit card.
What Is a Secured Credit Card?
A secured credit card works the same as a regular credit card except that you make a deposit as collateral to open the account. As with other cards, you'll make purchases and repay them after, either in full or with monthly payments. The purpose of the security deposit is to lower the card issuer's risk, making secured cards easier to qualify for than many traditional credit cards.
You might consider applying for a secured credit card if:
- Your recent credit card applications have been denied.
- You're a student or recent graduate without a credit history.
- You have derogatory accounts on your credit report.
- You've filed for bankruptcy.
- You recently moved to the United States.
Typically, your credit limit—the maximum amount you can spend on your credit card—is equal to the amount of the security deposit.
Example: With many secured cards, if you make a $200 security deposit, your credit limit will be $200. Your deposit is kept in an account until you upgrade to an unsecured credit card or you close your account. Some credit card issuers may raise your credit limit automatically after several months of timely payments.
If you default on payments, your card issuer may use the deposit to cover your outstanding balance. When you maintain timely payments, your deposit will be returned to you either when you close the card in good standing or you're upgraded to an unsecured card after several months of responsible use.
Learn more: How to Get a Secured Credit Card
Do Secured Credit Cards Build Credit History?
Secured credit cards can help you build your credit history when the card issuer reports your account activity to at least one of the three credit bureaus (Experian, TransUnion or Equifax), and preferably all three. Be sure to check that any secured credit cards you're considering report your account activity to the consumer credit bureaus.
When your secured credit card is reported, your account information—your payment history, balance, credit limit and account age—is included in your credit file. That information is then used to generate your credit score, which credit card issuers and lenders use to gauge your creditworthiness.
A solid credit history doesn't happen overnight. Building a credit history is a gradual process that happens over time. If you have a limited credit history or past credit mistakes, a secured credit card gives you an opportunity to establish positive payment habits and eventually build a better credit score.
The timeline for building your credit depends on several factors, including your previous credit history and other active credit accounts. If you're new to credit, a secured credit card can help you establish a payment history. You'll need six months of account history before a FICO® Score☉ Θ can be generated for you. Improving your credit score after missed payments or collections may take longer because negative information stays on your credit reports for seven to 10 years.
How to Build Credit With a Secured Credit Card
Secured credit cards can help you build credit just like a traditional card. The key is using your card regularly and responsibly. Here's how to use a secured card to build credit.
1. Choose the Right Card
Look for a secured credit card that reports to the major credit bureaus. This is essential for building a credit history. A card that offers the opportunity to upgrade to an unsecured credit card is also a good option. Additionally, compare annual fees, minimum deposits and upgrade opportunities.
Learn more: How to Upgrade a Secured Card to an Unsecured Card
2. Use the Card Regularly
Simply having a secured credit card isn't enough; you need to actively use it if you want to build your credit. Make small purchases on your credit card regularly and pay them off. An inactive credit card may eventually be closed, which could have a negative impact on your credit.
3. Keep a Low Balance
Avoid maxing out your credit card. High balances are harder to repay and negatively impact your credit score because they'll reflect a high credit utilization rate.
Instead, use only a small amount of your credit limit to keep your balance low relative to your credit limit. Aim to keep your balance below 30% of your credit limit, but the lower, the better for credit scores.
4. Pay on Time Always
Because payment history is the most significant factor in your credit score, on-time payments are crucial to building your credit. Ideally, you should pay your balance in full each month. If you can't pay in full, aim to make at least the minimum payment by the due date.
5. Monitor Your Credit Score
Regularly check your credit score to track how your credit card use is affecting your credit. An unexpected drop in your credit score could indicate an error on your credit report, which you should deal with right away. You have the right to dispute any information you believe to be inaccurate or fraudulent.
Tip: In addition to checking your credit score, review your credit reports for accuracy. You can check your credit report and FICO® Score for free anytime with Experian. You will also get tips on steps you can take to improve your credit.
How Much Will a Secured Card Help Your Credit?
It's impossible to predict how much your credit can improve by using a secured credit card since it's just one element of your overall credit picture. Your scores are influenced by all the information in your credit reports, including other accounts, outstanding loans and credit card balances, the amount of time you've been using credit and recent applications for new credit.
Using a secured card responsibly can help you build credit over time. Taking a look at the five primary credit scoring factors, here's how a secured credit card could help improve your credit.
- Payment history: Using a secured credit card can help you establish a track record of paying on time when your payment history is reported to the credit bureaus. Be sure to always pay on time: Even one late payment can remain on your credit reports for seven years.
- Amount of debt: Keeping a low balance on your secured credit card helps you maintain a healthy credit utilization ratio. Paying before your statement closes can help your credit score by keeping reported balances lower.
- Credit age: Keeping your secured credit card open longer shows you have more experience using credit. Upgrading to an unsecured version of your secured card can preserve your account history and contribute to your credit age.
- Credit mix: Having a secured credit card can help diversify the types of credit you have. Credit scoring models favor experience managing different types of credit, such as revolving and installment accounts.
- New credit: Opening a secured credit card may cause a short-term dip in your credit score due to the hard inquiry on your credit report, but your score can recover as the initial inquiry ages.
Learn more: Reasons to Keep a Secured Card After Improving Your Score
More Ways to Build Credit
In addition to using a secured credit card, there are several other ways you can build credit. Combining several positive habits can accelerate your credit-building progress.
- Become an authorized user. Consider asking a family member or friend to add you to one of their credit cards with a long, positive credit history. As an authorized user, you can benefit from a credit card's existing account history. You won't be responsible for making payments on the account, but if it's included on your credit report, your credit score could benefit.
- Consider a credit-builder loan. A credit-builder loan works in reverse to a typical loan: The loan amount is deposited into a bank account while you make monthly payments that get reported to the credit bureaus. At the end of the loan's repayment term, the loan amount—possibly plus interest—is yours to keep. Just make sure the lender reports to all three credit bureaus before applying.
- Ask a family member or friend to cosign a loan. If you need to borrow money and have a trusted relationship with a family member with good credit, asking them to cosign a loan can help you build credit. Keep in mind that any late payments you make will appear on their credit report, too, so it's critical that you make every payment on time.
- Get credit for paying your regular bills. You can benefit from timely payments on your regular bills by using a feature like Experian Boost®ø®ø. With your authorization, qualifying bills including utilities, rent, insurance and streaming services can be added to your credit report and could help build your credit score. This can be especially beneficial if you have a thin credit file with few credit accounts.
- Don't close old accounts. Older accounts help boost your credit age, showing you have more experience using credit. It's best to leave these accounts open, using them periodically to keep them open and active.
Learn more: How Long Does It Take to Build Credit?
The Bottom Line
A secured credit card is an excellent option if you're just starting out with credit or you've had trouble getting approved for a traditional credit card. Many of the best secured credit cards have a low security deposit, which makes it easier to get started.
As you use your credit card, sign up for free credit monitoring from Experian to see where you stand. You can watch for improvements or catch issues before they derail your credit score progress.