How can a secured card help build credit?

‍The gist: A secured card can help build credit because it offers users access to credit without already having a great credit score and reports on time payments to credit bureaus.

Most secured cards share your payment information with the three major credit reporting bureaus, Experian, Equifax, and TransUnion. You can expect to see your score gradually rise if you make regular, on time payments in full. In fact, if this is your first time using credit, you’ll get a VantageScore after 1 month and a FICO score after 6 months.

If you’re using a secured card to repair bad credit it will likely take about 12 to 18 months to move from “poor” to “fair.”

A secured card is a great way to build or boost your credit score because you can get one fast and without much paperwork.

What is a secured card? 

A secured card is a kind of credit card that requires a cash security deposit. The amount of the deposit is the same as the card’s credit limit. Therefore, if the deposit is $200, you can only use the secured card for purchases up to $200. The deposit gives the card issuer assurance that you can repay the balance in full.

When you make a purchase with the card you’re not deducting from the deposit. Instead, you receive a monthly statement showing the amount owed. The deposit stays with the card issuer until your account balance is paid off and the account is closed, or if you decide to convert the card to an unsecured credit card.     

How can secured cards build credit?

Building credit with a secured card is like crossing a stream. Every on time payment you make is another stone you place in the water. If you make enough on time payments you have enough stepping stones to cross the water. 

Making this crossing means moving from a credit score of “fair” (580-669) to “good,” (670-739) and possibly to “very good” (740-799). Some secured cards even allow you to monitor your progress with an app.

To build credit you need to make at least the minimum payment amount by the due date. What’s even better is paying the full balance. Doing so prevents carrying a balance from one month to the next which can be expensive since you’ll need to pay interest. 

Therefore, the most effective way to build credit with a secured card is to:

• Use it for small to medium purchases
• Make the payments on time
• Pay the balance in full
• Use it regularly to build a history

What is needed to get a secured card?

1. Online application

The process for getting a secured card is simple and quick. Usually, you’ll complete an online application which requests basic information like your name, address, date of birth, Social Security number, and employment status.

2. Credit history review

The issuer will usually look at your credit history. The issuer is often less concerned about a low credit score or no credit history because they have your security deposit as collateral. However, they will likely still check for things like a personal bankruptcy or a repeated history of missed payments on other credit cards. Some secured cards have no minimum credit score requirement.

3. Cash deposit

Lastly, you’ll need to have the cash to make a deposit. Almost all secured cards will have some kind of minimum deposit requirement. The minimum deposit is usually $200 to $300. If you want a higher credit limit you’ll need to make a bigger security deposit.

Tips on using a secured card to build credit

Have the deposit ready

You must make a security deposit in order to use the card. Most issuers will not open the account until they’ve received the deposit. The process will take longer if you start the application before you have the money. 

Watch your score

Nothing motivates like results. As you watch your score slowly improve you’ll be more likely to make the regular payments needed to maintain and increase your credit score. Monitoring your score is also a way to ensure that the issuer and credit bureaus are correctly reporting your responsible use of the card.

Keep interest payments to a minimum

You’ll be charged interest when you carry a balance from one month to the next. These costs add up fast. Higher interest payments leave less money for the purchases you need to make. Therefore, it’s best to pay your balance in full every month.  

Use the card regularly

Building credit requires more than just on time payments. It also requires regular use. Boosting your score means showing the credit bureaus that you are consistent with your repayments and that you can use credit repeatedly without falling behind.

What is the cost of using a secured card? Is it worth it?

There are a few costs to consider when getting a secured card.

Annual fee

Some secured cards charge an annual fee. For example, the issuer might charge you $35 once a year. However, many secured cards do not charge this fee. Watch for maintenance fees and processing fees also.

Cash deposit

To start using the card you’ll need to make a cash deposit. This feels like a cost but remember, as long as you make on time payments, the issuer will return the deposit when you close the account or convert to an unsecured card.

Credit inquiry

The application process usually involves what is called a “hard inquiry” which means that the issuer reviews your credit history which can lower your credit score slightly. Fortunately, according to FICO, new credit account applications account for just 10% of your score.

A secured card is well worth these costs considering that the annual fee can be avoided and that the cash deposit can be returned.

Are there any risks to using a secured card?

As with most financial products, there are some risks to having a secured card. This being said, the risks to using a secured card are generally within your control. These risks include two main factors. 

First, there is the risk of damaging your credit score. You can avoid this damage by making regular payments.

Second, there is a small risk of fraud. This can be drastically reduced by ensuring that you keep the card in your possession at all times. You’ll also want to check that the issuer offers zero-fraud liability, and quick replacement for lost or stolen cards while offering bank-level security and encryption.

Using a secured card versus traditional credit card to build credit - Which is better?

Go for a secured card when:

• You’re starting to build credit for the first time
• You’re trying to boost a poor credit score
• You’re planning to make small to medium purchases with the card
• You’re ready to make a cash deposit 

Go for a traditional credit card when:

• You’re comfortable using a larger credit limit
• You’re interested in larger reward programs
• You’re secured card issuer offers to convert to an unsecured card
• You’re ready to use credit as a form of payment for more purchases

When should I change my secured card into an unsecured card?

Make the switch from a secured card to an unsecured card when you feel comfortable using a larger credit limit. This is a big step because you will no longer have the security deposit as a guardrail. 

You’ll also need to wait for the card issuer to allow this switch. Many issuers will want to see several months of responsible use or even a year of on time payments before they extend this offer.