How to Use a Secured Credit Card to Build Credit

How to Use a Secured Credit Card to Build Credit

Table of Contents

  1. What Is a Secured Credit Card?
  2. How Does a Secured Credit Card Work?
  3. Best Practices to Use a Secured Credit Card to Build Credit
  4. Moving From Secured to Unsecured Credit Cards
  5. FAQs About Secured Credit Cards
  6. Useful Resources

What Is a Secured Credit Card?

A secured credit card is different from a traditional credit card because it requires a security deposit. This deposit becomes your credit limit and protects the issuer from risk. This card is ideal for individuals with poor or no credit history, helping them gain access to credit while demonstrating responsible borrowing.

How Does a Secured Credit Card Work?

The process of getting a secured credit card is straightforward. You apply for the card and, once approved, provide a security deposit to the issuer. This deposit becomes your credit limit. For example, if you deposit $300, your credit limit is $300. You then use the card for everyday purchases, just as you would with any other credit card. When you make a purchase, your available credit decreases.

Each month, the card issuer reports your payment history and card activity to the major credit bureaus. By making on-time payments and keeping your balance low, you build a positive credit history. This new history, documented by the credit bureaus, gradually helps raise your credit score. Many secured cards also offer a path to becoming an unsecured card, where the issuer returns your deposit after a period of good behavior, and you can access a higher credit limit.

Best Practices to Use a Secured Credit Card to Build Credit

  • Always Pay On Time: Payment history is the most critical factor in your credit score. Use automatic payments or calendar alerts to avoid missed payments.
  • Keep Your Credit Utilization Low: Aim for under 30% utilization, ideally below 10%. For a $300 limit, that means using no more than $30-$90 monthly.
  • Use the Card Regularly but Responsibly: Make small purchases you can easily pay off, such as groceries or gas. This shows consistent, responsible credit use.

Moving From Secured to Unsecured Credit Cards

Typically, after 12-24 months of responsible use, your issuer may offer to transition your secured card into an unsecured one, returning your deposit. This upgrade often includes a higher credit limit and additional benefits, reflecting your improved creditworthiness.

FAQs About Secured Credit Cards

Q: Can secured credit cards improve my credit score?
A: Yes, with consistent on-time payments and low utilization, secured cards can significantly boost your credit.

Q: Is the security deposit refundable?
A: Yes, once your account is in good standing, the deposit is refunded when you graduate to an unsecured card or close the account.

Q: How long before I see credit improvements?
A: Typically 6 to 12 months of responsible card use can improve your credit score.

Useful Resources