How to Use a Secured Credit Card

How to Use a Secured Credit Card article image.

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The best way to strengthen your credit score is to use credit responsibly. The challenge is that qualifying for a traditional credit card can prove tricky if you've got poor credit or a thin credit file. Secured credit cards, which tend to have looser eligibility requirements, offer a potential solution.

Secured cards work like regular credit cards, except that they require a refundable security deposit. The amount of your deposit typically determines your credit limit, and the card issuer can keep the deposit if you stop making payments on the card.

The main benefit of using a secured credit card is that it can help improve your credit score. If the card issuer reports your payment activity to at least one of the three major credit bureaus—and you pay your bill as expected each month—your credit score can increase over time.

Understand How Secured Credit Cards Build Credit

When you make on-time credit card payments month after month, you're demonstrating that you're capable of managing credit responsibly. This is no small accomplishment. A strong payment history is the most important factor in your FICO® Score , and making on-time payments on a secured credit card can be an effective way to boost your credit scores over the long haul.

Like with other types of credit, secured card issuers can report your payment activity to the three major consumer credit bureaus (Experian, TransUnion and Equifax). This payment activity not only includes the on-time payments that reflect positively in your report, but also any negative information such as late payments, default and high balances.

If you're applying for a secured card in an attempt to improve your credit, make sure you use the card responsibly and can afford to make payments as required. Missing payments and defaulting on a secured card can leave you worse off than before.

Once you receive a secured card and start using it, it can take roughly one to two months for a new account to pop up on your credit report. If you're establishing credit for the first time, it generally takes six months to calculate your FICO® Score. In other words, be patient and know that your good work will pay off in due time.

Make Sure You Choose the Right Secured Card

Using a secured credit card can be a great way to rebuild your credit or establish it from scratch. Think of it as a temporary solution to help you get your credit score moving in the right direction. Before you start filling out applications, know that not all secured credit cards are created equal. Keep the following factors in mind when shopping around:

  • Annual fees: Some card issuers charge an annual or monthly fee to keep the account active. You can save money by comparing different cards to find the best deal. The Capital One Platinum Secured Credit Card, for example, is among the best secured credit cards that don't have an annual fee.
  • APRs: When it comes to credit cards, the annual percentage rate (APR) gives you an idea of what your interest costs will be if you carry a balance. Unfortunately, rates tend to be higher with secured credit cards. The upside, however, is that you can avoid this fee if you pay off your balance in full each month.
  • Miscellaneous fees: Look out for other credit card fees that could end up costing you in the long run. For example, some card issuers throw in an application fee. Others may charge processing fees or other extra cardholder charges. Foreign transaction fees are also common. It's always wise to read the fine print.

Practice Healthy Credit Habits With Your Secured Credit Card

Following good credit habits can help you make the most out of a secured credit card. The following steps are both simple and effective:

  • Pay your bill on time every month. Again, this is the most important action item, as your payment history makes up 35% of your FICO® Score. Setting up automatic payments can prevent you from missing a due date. You only have to pay your required minimum payment for it to count as an on-time payment, but paying more will help you keep your card balances down.
  • Don't max out your card. It's ideal to pay off your card balances in full each month. If you do carry a balance, try to keep it below 30% of your credit limit. (Exceeding that amount can drag down your score, since credit utilization is an important factor in score calculations.)
  • Know what's on your credit report. Whether you're establishing your credit history or taking steps to improve your credit score, it's wise to periodically check your credit report. Doing so can help you keep up with your progress. It can also alert you to any potential identity theft that may be happening in the background. Accounts you don't recognize are a major red flag and can indicate fraud.

After demonstrating that you're able to use the card responsibly, you may be able to get your security deposit back. In some cases, the card issuer will return your deposit and then convert your account to an unsecured card. You can also get your deposit back by paying off your balance and closing the account. Either way, it's possible to walk away with a stronger credit score than when you started—as long as you use your secured credit card responsibly.

Upgrade to an Unsecured Credit Card

Some secured credit card issuers may automatically approve you for an unsecured card after you've made on-time payments for a number of months. Others will require you to formally apply. Using your secured card can also help you improve your credit to the point that you become eligible for unsecured credit cards from other issuers. In this case, you can choose to either keep your secured card open or cancel it and get your security deposit back. When deciding your next move, take a look at your finances and the effect closing a secured card could have on your credit utilization, which is an important factor in your scores.

It helps to know your credit score before applying for a new card since credit card issuers will be looking at it when they decide whether to approve your application. Having this information can give you an idea of what cards you might qualify for and the interest rates you can expect to get. Generally speaking, a higher score opens the door for lower rates and better terms. Knowing your score can also prevent you from applying for cards you won't qualify for. This is a biggie as applying for too many credit cards all at once can have a negative impact on your credit score.

Just like with secured credit cards, you'll want to compare unsecured cards to find one that has the best rates, terms, fees, and possibly rewards. Most allow you to apply or prequalify online. Be prepared to provide basic personal information, along with details related to your employment, income and expenses. Experian CreditMatch™ can present you with credit cards suitable for your particular credit profile.

The Bottom Line

A secured credit card could be the steppingstone you need to help establish your credit or revive a credit score, as long as you use it responsibly. Checking out Experian Boost is another way to potentially improve your score. It's a hands-off tool that allows you to get credit for making on-time utility and phone payments and other bill payments that aren't typically reported to the credit bureaus.

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