If your credit scores aren't high enough to be approved for a traditional, unsecured credit card, a secured credit card can help you build credit. A good credit score will help you get the best terms on credit products, including home mortgages, car loans and credit cards.
As with standard, unsecured credit cards, you can use a secured card to make purchases and pay bills. But unlike standard credit cards, you'll have to first supply a refundable security deposit that'll typically be used to fund your credit limit.
Not all secured cards are created equal. Before applying for a secured credit card, look for a card that's easy to maintain, has minimal fees and reports your credit activity to the three major credit bureaus.
Secured credit cards don't come with the frills of rewards and perks, but they offer a low-risk way to improve your credit with minimal requirements. Some credit card issuers will even consider "graduating" you to a traditional rewards credit card and refunding your security deposit over time. Here's what you need to know about building credit with a secured card and how it can help bolster your credit score.
What is a secured card, and how does it work?
Secured credit cards are designed for people with a limited or poor credit history and can help you establish or rebuild your score over time when used responsibly. Like a standard credit card, you can use a secured card to make purchases online or at a physical location that accepts credit cards.
The big difference between secured and traditional credit cards is that secured credit cards require a security deposit, which often serves as your credit limit. For instance, if your deposit is $250, your credit line will also generally be $250. You can usually increase your limit by depositing more funds.
And because you've put up a deposit, there's less risk to the issuer. If you can't pay back what you owe, the issuer can take your security deposit to pay your debts. This makes it easier for card issuers to approve your application -- even if you have no or limited credit history.
Most secured cards report your activity to the three major credit bureaus -- Experian, TransUnion and Equifax -- so you can build up your credit profile.
If you show responsible habits, such as making on-time payments, the card issuer may consider refunding your security deposit and upgrading you to an unsecured credit card that may come with rewards.
Who is a secured card best for?
If your credit score falls below 580 -- the threshold for a "fair" credit score under the FICO scoring system -- or you have a limited credit history, you should consider a secured credit card. Secured cards offer a good opportunity to work on your credit score through responsible credit card usage.
A secured credit card will still require a hard credit inquiry but comes with fewer approval requirements to better your chances. Or if you're new to building credit, a secured credit card can help you establish a positive credit history.
Eligibility for a secured credit card
Even though secured cards are intended for people with lower credit scores, you'll still need to meet a few eligibility requirements. A card issuer will want to confirm your income, and some will want to run a credit check.
Additionally, you'll need to be able to prove your identity and that you're not currently in default on any loans, have filed for bankruptcy or have any pending foreclosures.
How to choose a secured credit card
When shopping for a secured card, you'll want to consider the security deposit, cards limits, fees, benefits, credit-reporting features and some other key factors.
Security deposit/credit limit
All secured credit cards require a one-time, refundable deposit upon approval, so make sure you can afford the deposit. Some credit card issuers may refund this deposit after you keep your account in good standing for a number of months -- especially if you use your card to make at least a few purchases and then make your monthly payment on time. Other issuers may only refund your deposit if you close the card.
Deposits typically range from $200 and up, depending on the issuer. Depositing more money will usually provide a greater credit limit, which could help improve your credit. Although some issuers offer secured cards with credit limits higher than what you're required to deposit.
Fees
On top of your deposit, some secured cards will ask for a fee when opening your account. Compare fees across multiple card providers and factor that into the upfront cost of getting a card.
Some issuers charge an annual fee for a secured credit card -- we recommend that you avoid those, given that plenty don't. If you opt for an unsecured credit card designed to build credit, you may need to pay an annual fee.
It's also worth noting that secured credit cards may feature higher late fees than unsecured credit cards. If you pay at least the minimum monthly payment on time consistently, you shouldn't have to worry about these fees.
Credit-reporting features
It's important to make sure your card issuer will report your account activity to the credit bureaus. While most issuers do so, it's a good idea to check, since it will only affect your credit history and credit scores if the information is included on your credit report. if a card you're considering doesn't openly state its credit reporting policy, contact the card company to confirm that the credit bureaus will receive reports on your credit card activity.
APR
Another factor to consider is a card's annual percentage rate, or APR -- the rate at which your credit card balance accrues interest. You accrue interest only if you carry a balance from month to month, and we highly recommend avoiding revolving a balance to avoid interest charges. It's best to pay off your entire statement balance each month, but it's critical to at least pay the minimum payment to avoid fees and penalty APRs.
Benefits
Some secured cards come with robust credit tools to help you stay on track and may even offer the opportunity to earn rewards. Remember, the primary reason to use a secured card is to improve your credit score. If you're looking at a secured card that also has a rewards program, just make sure you can pay off your balance on time every month. Otherwise, interest charges and late fees could wipe out the value of any rewards you earn.
Upgrade option
If your goal is to get approved for a traditional credit card, look at a secured card's options to upgrade to a traditional credit card or increase your credit limit down the line.
Pro tip
It's a good idea to find one card that will suit your needs rather than applying for multiple cards at the same time. Even if you're approved for all of them, this could hurt your credit. If you're not sure if you'll be approved for a secured credit card, most card issuers offer some form of preapproval that lets you check your chances of approval without harming your credit score before officially applying.
How to get the most from your secured credit card
The point of a secured credit card is to help you build your credit. And the best way to do that is by creating a history of on-time payments. Most issuers let you set up autopayments or alerts to let you know when a payment is due. That will help ensure you never miss a credit card payment.
Another tip is to keep your credit utilization low. Treating your credit card like it's a debit card will go a long way toward keeping your utilization below 30%, which is the maximum recommended by most experts -- although lower is better. By paying off the purchases you make right away, you'll never have to worry about charging up to your credit limit.
Pro tip
Remember that the point of getting a secured card is to build your credit and practice responsible financial habits. Maxing out your card -- or spending up to your credit limit -- will do two things: bump up your credit utilization rate, which hurts your credit score, and make it harder to keep up with your card payments.
What experts are saying about secured credit cards
The primary reason people should opt for a secured credit card is to help build their credit. And the best way to do that is to pay your card on time. To help establish your payment history, credit expert Gerri Detweiler recommended charging an essential bill to your card and then paying it off immediately.
"It sounds obvious to pay on time, but life gets busy, and also the credit card websites can be confusing sometimes," she said, adding that setting up autopay can help cut through some of that confusion.
Deitweiller also suggests you keep a close eye on your credit limit. "The biggest mistake with the credit-builder cards -- especially if it's a secured card -- is that it's easy to bump up against high utilization because its credit limit is low," she said.
According to credit expert Beverly Harzog, you could see your credit profile improve after 12 to 18 months of responsible use. That means paying your bill on time and not racking up credit card debt. After you open and use your secured card, keep tabs on your credit score. Many credit card issuers offer cardholders credit monitoring tools, or you can sign up for a free credit monitoring service.
How to apply for a secured credit card
Follow these steps to apply for a secured credit card:
- Choose the secured card that fits your needs. There are plenty of secured credit cards available that can help you boost your score with responsible use. Look at rates and fees, qualification criteria, rewards and other benefits to find the right one for you.
- Apply securely on the credit card issuer's site. Once you find a secured card you want to apply for, visit the issuer's site to submit a formal application
- Pay the security deposit. Remember, having a larger credit line -- which you can usually secure with a larger initial deposit -- could boost your credit score, so long as you won't be tempted to make unnecessary purchases.
- If you're approved, start using your credit card responsibly. Pay your bill on time and in full each month to remain in good standing with your issuer, build your credit score and avoid accruing interest charges.
FAQs
How much do I have to deposit with a secured credit card?
Each card has its own security deposit requirements. Remember this deposit generally serves as your line of credit, so keep that in mind when reviewing deposit requirements across credit cards.
How is my credit score calculated?
Credit scores are calculated by looking at a variety of factors related to your personal credit, including length of credit history, payment history, amounts owed, new credit and credit mix. The exact weight of each factor depends on the score model (FICO, VantageScore or other) and your own credit history. If, for example, you have no credit history, the other factors may be weighted more heavily.
How long does it take to improve my credit score?
After opening a secured credit card account, it will take around one to two months for the secured credit card issuer to report it to a major credit bureau, at which point it will begin impacting your credit report and your credit score. Then it takes several additional months before the account's activity is substantial enough to make a difference. If you maintain a low or $0 balance and manage the rest of your finances well, you could raise your score several hundred points in a year or two, but it'll depend on your particular situation. If you have a longer credit history with a number of issues, it will take longer. If you have a shorter history, each month's activity will play a much larger role.
Why do you recommend paying off the account two to three times a month?
By paying off your account more than once a month, you greatly reduce the risk of paying late, missing a payment or getting charged interest for an outstanding balance. We recommend choosing set days to make payments, like the 15th and 30th of every month, or the 10th, 20th and 30th.
How often should I use my secured credit card?
Swipe it two or three times a month to ensure the account is considered active. There's just no reason to use it any more than that, or make it your primary way of paying for things. A secured credit card is a tool for repairing damaged credit from an unsecured card or cards or establishing and building credit. To simplify your finances, it's best to make other purchases with cash or a debit card. Studies show that consumers who pay with credit tend to spend more than they would if they paid with cash, so if you're trying to right the ship or start on the right track, it's best to first establish a budget through cash or debit card purchases to ensure you don't spend beyond that budget.
Should I keep a secured credit card once my credit is in better shape?
Yes. Keeping the account open, active and with a $0 balance will continue to improve your credit score as the length of the credit history grows and you maintain a low credit utilization.
Is there ever a situation when I would use a secured credit card like a balance transfer credit card?
No. We don't ever recommend transferring a balance to a secured credit card. Some websites may tout particular secured credit cards for introductory 0% APR offers, but we strongly advise against transferring a balance. If you're looking for a card for balance transfers, consider a balance transfer credit card or look into other ways of dealing with credit card debt.
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