A secured credit card is a credit-building tool that may work well for people who are new to credit and those who are working to recover from credit damage. Traditional or unsecured credit cards could be difficult to qualify for when you have credit challenges. Yet even with no credit or bad credit, you may be able to satisfy the necessary qualification criteria to open a secured credit card.
If you’re considering a secured credit card as a way to rebuild or establish credit, it’s wise to understand how these types of accounts work. Although secured cards typically won’t transform your credit scores overnight, they do have the potential to help you build positive credit over time when you manage them in a responsible way.
How do secured credit cards work?
In many ways, secured credit cards work like traditional credit cards. The cards typically operate on a major credit card network—Visa, Mastercard, American Express, or Discover. And you can use the accounts to make purchases anywhere that accepts these payment methods.
Many secured credit card issuers report the accounts to one or more of the major credit bureaus as well—Equifax, TransUnion, and Experian. So, when you open a secured credit card, there’s a good chance it will show up on your credit reports.
The primary way a secured credit card differs from a traditional unsecured credit card takes place when you open the account. In general, the card issuer will require you to provide collateral to back the credit card—a cash security deposit that’s often equal to your credit limit.
If you open a $300 secured credit card, it’s common for the card issuer to request a $300 security deposit. Yet some card issuers, like Capital One, may be willing to approve you for a secured credit card that features a higher credit limit than your required deposit.
Secured credit cards often feature higher interest rates than unsecured credit cards as well. However, if you don’t revolve a balance on your secured credit card, the APR on your account shouldn’t impact you. When you pay off your full statement balance every month you can avoid paying interest charges on your account. But if you carry a balance from one month to the next, the higher interest rates could cost you a great deal of money.
Does a secured credit card build credit?
In many cases, it is possible for a secured credit card to help you build credit. But a few details need to be in order first.
- Credit reporting: The card issuer must report the account to at least one of the major credit bureaus before a secured credit card has the potential to help you build credit. And it’s better if the card issuer reports the account to all three credit bureaus instead. If a secured credit card doesn’t show up on your credit reports, it won’t have the ability to help you establish credit history or a credit score.
Account management: As with any credit obligation, the way you handle your secured credit card determines the impact it has on your credit. If you make late payments and use a high percentage of your credit card limit (aka have a high credit utilization ratio), the account could damage your credit score. But if you practice responsible credit card management habits, the account could benefit your credit score over time.
How to use a secured card responsibly
If you decide to open a secured credit card to build credit, it’s wise to set up safeguards to make sure you use the account responsibly. The following tips may help.
- Compare multiple credit cards. Before you open a secured card, it’s smart to shop around and compare your options. Some secured cards may feature lower security deposit requirements than others. You may find other secured cards with better rewards, lower APRs, other more appealing benefits than the competition has to offer.
- Avoid overspending. It’s important to create a budget and only charge what you can afford to pay in full each month on your secured card. Carrying a balance from month to month will cause you to incur expensive interest charges and could damage your credit score by increasing your credit utilization ratio.
- Schedule automatic payments. Setting up autopay on your secured card, at least for the minimum payment, can help you avoid accidentally missing the due date on your account. If you’re comfortable doing so, consider scheduling an auto draft for the full statement balance.
- Set up account alerts. Many card issuers will let you set up text and email alerts to inform you when different actions take place on your credit card account. For example, you may be able to receive alerts when the balance on your account reaches a certain level or when your due date is approaching. These alerts can keep you informed and help you avoid potential problems.
How long does it take to build credit with a secured credit card?
The amount of time it takes to build credit with a secured credit card can vary depending on a few factors. First, you can only establish credit with a secured card (or any other type of account) if the tradeline appears on your credit report.
Once an account appears on your credit report, the credit-building process begins. However, just because you have one credit card on your credit report doesn’t mean you’ll be automatically eligible for a credit score. Credit scoring models, like FICO and VantageScore, have different requirements when it comes to calculating credit scores for consumers for the first time.
For example, your credit report needs at least one account that’s been open for six months or more before it’s eligible for a FICO Score. That same account (or another tradeline on your credit report) must also show activity that’s been reported to the credit bureau within the last six months.
On the other hand, some VantageScore credit scoring models may issue you a credit score as soon as you have at least one account show up on your credit report. So, even a new secured credit card might make you eligible for a VantageScore credit score.
It’s worth noting that 90% of top lenders rely on FICO Scores for lending decisions. That means when you apply for financing, like a loan or credit card, there’s a good chance the lender will check your FICO Scores to see if you qualify and to set your interest rate and borrowing terms.
How much will a secured credit card raise my credit score?
It’s impossible to say for sure how much a secured credit card will raise your credit score or, indeed, whether the account will improve your credit at all. Everyone’s credit situation is unique. And the way you use your account will also determine whether your new secured credit card is beneficial or damaging to your credit rating in the end.
If your goal in opening a secured card is to improve your credit score, it’s important to practice good credit management skills on a consistent basis—both with your new card and any other accounts you open. Additional tips that might help you earn and keep a good credit score are as follows.
- Pay every credit obligation on time. Late payments could damage your credit score and may remain on your credit report for up to seven years.
- Check your credit reports. If errors or fraud appear on your credit reports, they could lower your credit scores unfairly. But the Fair Credit Reporting Act (FCRA) allows you to dispute credit errors, if they happen, with the credit reporting agencies.
- Avoid excessive credit applications. It’s fine to apply for new credit when you want or need financing. Yet excessive credit applications in a short period of time could result in too many hard inquiries on your credit report, and that could be bad for your credit score.
Bottom Line
Your credit can impact your life in many ways. If you need to lease an apartment, buy a home, finance a car, or apply for other financing at some point down the road, your credit will most likely come into play. Your credit score might even affect the cost of your car insurance premiums depending on where you live.
So, if you have no credit history or a bad credit score, it’s important to find ways to improve your situation. A secured credit card could be a useful tool to help you establish credit if you find it difficult to qualify for traditional loans or credit cards. And with responsible account management, you may eventually be able to make the switch to an unsecured credit card in the future.
