Building your credit score is important for your financial future, but it can be difficult. Learn how to build your credit with a secured credit card.
Secured credit cards require an initial deposit, and that deposit becomes your limit. You apply for them like any other card, and your card issuer reports your on-time payments to the credit bureaus to boost your score. Most people with secured credit cards can eventually switch to traditional ones.
Explore secured credit cards in more detail, including how to apply for them and how they will help you build your credit.
With credit cards being used for 28% of all payments in 2021, having a credit card is essential for most people. But what if your credit score isn’t good enough for a traditional credit card? A secured card is an excellent alternative and will help you build your credit score. You will likely even be able to switch to a traditional credit card at some point. Learn how to get a secured credit card and start improving your score.
Getting a secured credit card is similar to applying for any other credit card. The main differences are that your credit score won’t matter, and you will have to make an initial deposit.
Before applying for any secured credit cards, figure out your goals and what you want from the card. One of your goals is likely to build your credit. So, you know you want a card that reports payments to the credit bureau.
But you need to also think about other goals. What type of credit limit do you need? You will always have to deposit the amount that becomes your limit with a secured card. But some credit cards only let you deposit (and have a limit) of up to $100, while others let you get limits of $500, $1,000, or more.
This is also the time to think about your future credit card plans. Do you want to be able to transition to a non-secured credit card from the same company eventually? Or are you okay with having to apply for a completely separate card from another issuer when your score improves?
You will also want to consider if any rewards are important to you. That being said, don’t expect great rewards from secured credit cards. Many don’t have any rewards, and those that do typically have higher annual fees to make up for them.
Once you have a better idea of your goals, it’s time to start looking at credit card options. There are many secured credit cards on the market, so you should have your choice of options.
Check Requirements
The first thing to do is confirm that you meet the requirements for a chosen card. Most secured credit cards don’t require a specific credit score, but some might. In many cases, you just need to provide an ID and basic information and make the deposit.
Confirm They Report to the Bureaus
If your goal is to build your credit score with your secured card, then only consider cards that report to the credit bureaus. The ideal scenario is to choose a credit card that reports to all three major bureaus: Experian, Equifax, and TransUnion. At the least, choose one that reports to two of them.
If the credit card doesn’t report to the bureaus, don’t consider it. It will not help you improve your credit score.
Compare Rewards (If Any)
Once the basics are out of the way, it’s time to look at rewards. As mentioned, most secured credit cards won’t have rewards, but you can find a handful that do. This will likely be in the form of cashback schemes or points that you can redeem for something.
Look at rewards in the context of fees. If you use the rewards, they can make up for high fees, but it may be wise to stick to a low-fee or fee-free card without any rewards.
Check Annual Fees
Because secured credit cards are geared toward people who can’t get a traditional card, some credit card issuers take advantage of the fact that you may feel backed into a corner. They use this to charge you high annual fees. They argue that this is because of the increased risk of lending to you.
But your deposit already reduces the risk of lending to you. So, you should not feel forced to settle for high fees. Compare at least a few cards to see what you can expect to pay to avoid being overcharged. There are some secured cards that don’t charge fees.
This is also the time to look at other fees. Examples include cash advance fees or currency conversions. You shouldn’t have late fees with a secured card, as your deposit covers your monthly payment if necessary.
Consider The Deposit
As mentioned, some secured cards will have minimum or maximum deposits. Remember that your deposit becomes your credit limit, but the funds in the deposit are tied up. As a rule of thumb, if you can afford to make a larger deposit, it is in your best interests to do so. That will help you keep your credit utilization ratio low, which boosts your credit score.
So, think about how much you want to deposit and confirm your chosen card lets you deposit that amount. You should also confirm when you need to make the deposit. You may have to make it as soon as your card is approved. Or you may have a few days or weeks to do so.
Consider Cards That Let You Upgrade To Traditional Credit Card
The best secured credit cards give you a simple upgrade path. These come from big names that also offer a range of unsecured credit cards. And after you improve your credit score or make on-time payments for a certain amount of time, you will be eligible for an upgrade.
Choosing a card that lets you upgrade to an unsecured one is much easier. But it also helps your credit score because your credit history length is one of the main factors affecting the score. Keep in mind that you will almost always have to apply for an upgrade or complete some sort of process. A handful of cards may upgrade you automatically, but these are rare.
If you choose a card without an upgrade path, it can still help your credit score. It will just require a few extra steps to apply for a traditional credit card once your score improves.
How The Deposit Is Used, Balances, And Interest Rates
There are a few variations of secured credit cards. All require a deposit, but what they do with those can vary.
Most have you pay your balance each month. The deposit is there if you default on the card balance, but it shouldn’t get touched until you cancel the card and have it returned. With these cards, pay attention to the grace period, meaning the amount of time you have to pay the balance before it starts accumulating interest. You also need to pay close attention to the interest rate on the card, as it is likely high. (Of course, you want to avoid late fees and interest by paying your balance in full each month anyway).
Some will automatically use your deposit to pay off your monthly balance, reducing your credit limit. Then, you can deposit more money to increase the limit again. This system is much rarer.
Once you have decided which secured card to apply for, the application process should be very straightforward. Most credit cards make it simple to apply online. Depending on the credit card issuer, you may also be able to visit a location in person, mail a paper application, or call.
When you are ready to apply, make sure you have some basic information on hand. Aside from your name, address, and birthdate, expect to provide the following:
How Long The Application Takes
Depending on the credit card and issuer, you may be approved in a matter of minutes. Other times, however, it may take a few business days. Some may even take a few weeks. Each credit card issuer should make it clear how long this will take.
Be Ready To Make A Deposit
Once you are approved for your credit card, you will need to make the deposit. Have the money ready, so you can do this right away. If you don’t deposit within a certain amount of time, your approval may be canceled.
Now that you have your credit card, it’s time to start using it responsibly. The good news is that many of the same habits that help you build credit with your secured card will also come in handy when you upgrade to a traditional card, as they are good tips to manage money. The following are some important things to keep in mind as you use the card.
Use The Card Regularly But Responsibly
You will need to use the card at least occasionally to build your credit history. So, use it for small transactions that you know you can pay off at the end of the month. Don’t splurge on purchases or think of the card as free money. Always confirm you can pay off any charges you make.
Keep A Low Balance
Do your best to keep your credit card balance low. This will keep your credit utilization ratio nice and low. That ratio compares the amount of available credit you have to the amount you are using. Ideally, you want it to be 30% or less. But keeping it as low as you can boost your credit score and shows future lenders that you are responsible with money.
Pay It In Full And On Time
The most important thing to do with your secured card is to always pay the balance in full and do so on time. When the card issuer reports this to the credit bureaus, this will boost your credit score. It will also help you set good habits for the future when you have a higher credit limit.
Track Your Credit Score
Get in the habit of occasionally checking your credit score. It should go up over time if you follow the previous tips.
As mentioned, the issuer of your secured credit card will report your payments and credit utilization to the credit bureaus. This will help you build your credit history and affect a few crucial factors that influence your credit score and your personal finances.
To start, your secured card will help you create a payment history. The payment history accounts for 35% of your credit score. This is the part of your score affected by making payments on time. Just remember that missing a payment (even on a secured card) can hurt this part of your credit score.
It’s also important to consider your credit utilization ratio, which makes up 30% of your FICO score. If you use less than 30% of the limit on your secured card, you will improve this part of your score.
If your issue is a lack of credit and not bad credit, then getting a secured card will also help you build a credit history. The length of this history affects 15% of your FICO store.
Depending on your finances, getting a secured card may also help your credit mix. The more diverse your credit accounts, the better your score is. The credit mix accounts for 10% of your FICO score and includes things like car loans, credit cards, mortgages, and student loans.
Applying for a secured credit card is just like applying for any other credit card. Expect to provide your social security number, personal information, and income. Carefully compare cards before applying, focusing on fees, deposits, and a path to upgrades. Then, keep your balance low and pay it in full every month to build your credit score.