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Building or rebuilding credit may seem like a tall order. But it doesn't have to be. Qualifying for a secured credit card may be easier than you expect, since many card issuers offer these products for people who have limited or poor credit histories.
A secured credit card can help you gain control of your credit and establish a strong financial profile. But to get one, you'll have to put down a deposit, which typically becomes your credit line. If you were hoping for a higher credit limit that would give you more purchasing power, a secured card could still be an option. Here's what you need to know.
What Is a Secured Credit Card?
There are two types of credit cards: unsecured and secured. When you apply for an unsecured credit card, the bank will typically approve or deny your application based on your record of on-time debt payments, past delinquencies and current credit score, among other possible factors. You're not required to put down any collateral to "secure" the credit line.
If you have poor credit or a limited credit history (known as a "thin file"), you may not qualify for an unsecured credit card. That's where secured cards come in. Because they require a deposit to open the account, secured cards are often a good option for people who can't qualify for an unsecured card.
A secured credit card can be a great tool for establishing or rebuilding your credit, since the barrier to entry is lower than with an unsecured card. The OpenSky® Secured Visa® Credit Card Card, for example, doesn't require a credit check at all, and reports your account activity to all three national credit bureaus: Experian, TransUnion and Equifax.
How a Secured Credit Card Works
The first step in opening a secured credit card is putting down a deposit. The size of the deposit depends on the bank or lender issuing a card. One company may require a $200 deposit but give you a $500 credit line, while another could make your deposit amount and credit line one and the same. You may want to compare different secured credit cards to figure out which terms make the most sense for you.
Once you put down the deposit and open the account, you can use your secured credit card the same way you'd use an unsecured card. You can cover one-off expenses, buy groceries, pay recurring bills—or use it for essentially anything you'd put on a standard card. Just remember that the deposit you put down to get the card doesn't serve as a form of payment: You still make payments on your card every month. The deposit is just there as insurance for the issuer in case you stop making payments.
As soon as you start making purchases and payments on your secured card, your lender will likely report the activity to one or more of the three national credit bureaus. That's a good thing—as long as you use your card responsibly—because all of that activity will help you develop a history of on-time payments and responsible credit use, helping you build a strong credit score.
If your secured card has a low credit limit, you'll need to be careful about how you use it. In addition to paying your bills on time, it's important to keep your credit utilization ratio low. Credit utilization refers to how much of your credit line you're using. A good rule of thumb is to aim for 30% or less credit line usage at all times. Not only does this help your credit score, but it may also help you build a habit of keeping balances low and thus avoiding high interest charges.
Keeping your credit utilization low can be more challenging with a low credit limit. For example, if you put down a $300 deposit and are granted a credit limit of the same amount, you'll need to keep your balance under $100 at all times to avoid hurting your credit score. If you were hoping to put a large purchase on the card or want a bit more flexibility, you may wonder what options you have to increase your credit limit.
Can You Increase a Secured Credit Card Limit?
Getting an increased credit limit on your secured credit card comes down to the card issuer's policy. The Capital One® Secured Mastercard®, for instance, comes with a potential credit line increase in as little as six months with no extra deposit needed, while the Merrick Bank Secured Visa® Card allows you to raise your credit line up to $3,000 whenever you choose simply by increasing your deposit.
With a Discover it® Secured credit card, the company periodically assesses your account starting after you've had the card for eight months and may refund your security deposit and transition you to an unsecured credit card if you've proven to be a trustworthy borrower. This card also allows cardholders to earn rewards, a rarity among secured cards, and even better, will match all the cash back new cardholders earn in their first year automatically—with no maximum.
Not all unsecured credit cards offer an easy way to increase your credit line or a path to an unsecured line. The Platinum Elite Mastercard® Secured Credit Card and the Platinum Select Mastercard® Secured Credit Card, both from First Progress, fall into this category. However, both are available to borrowers with low credit scores or limited credit histories, so they could serve as a stepping stone toward other accounts.
Even if a secured card does not offer a way to increase your credit line or switch to an unsecured account, it may help you build your credit enough to qualify for an unsecured card from another lender. By making your payments on time and keeping your credit usage low, you can raise your credit score and improve your chances of approval for other credit cards.
Track Your Progress
If you're trying to build credit, it's important to know whether your score is rising and what appears on your credit report. Experian's free credit monitoring service allows you to get credit score and credit report updates, as well as alerts when there are changes to your accounts.
That way, you'll know if there is any fraudulent activity and can notify your lender right away. Undetected fraud can end up on your credit report and drag down your credit score, so it helps to get notifications of any suspicious activity. You can also request a free copy of your credit report from each of the credit bureaus through AnnualCreditReport.com.
If you're considering a secured credit card to establish or rebuild credit, Experian CreditMatch™ can help you find the right card for your circumstances.