Maybe you’ve trashed your credit. Maybe you’ve never built credit at all. Either way, a secured credit card is an excellent way, when managed responsibly, to start building it up.
Secured cards are used by many people – some with poor credit, bad credit and even no credit, and others who have good credit but who like the features that secured cards offer.
How Secured Credit Cards Work
It’s easy to get started. Follow these four steps:
1. Get your credit score. Secured cards aren’t hard to qualify for, but you can fine-tune the process to help avoid rejection. Find out your credit score so that you apply only for cards you’re more likely to qualify for. Use Credit.com’s free Credit Report Card to receive two free credit scores, one from Experian, a major credit reporting agency, and another using VantageScore 3.0, a scoring system developed by the three major credit reporting agencies.
2. Shop. Using Credit.com’s credit card search tool, filter your search for cards according to your credit score. Read the fine print on each of offer, carefully comparing interest rates, fees, maintenance costs, penalties, grace periods and other details.
3. Deposit. Put down a deposit, usually $200 to $500, which becomes your collateral.
4. Learn your limit. You’ll get a credit limit, usually equivalent to your deposit. If you deposit $400, for example, your credit limit is $400.
Who Should Get Secured Cards
Even if you have good credit, there are reasons why a secured card may be a good fit for you. One of the secured card’s best features is its limitations, so you might like a secured card if you are:
- Sticking to a budget. A secured card can help, since you’ll always know that you have to keep your card balance low.
- New to using credit. A secured card works like training wheels: It’s a great way to learn and get comfortable using credit.
- A parent. Parents use secured cards to teach students and young people how to use credit carefully.
- On a limited budget. A secured card helps you avoid checking account overdraft fees when there’s not much money in your checking account. With a secured credit card, you don’t have to worry whether the money will be in your account when a check lands.
- Living debt-free. If you’re avoiding the temptations of a credit card but still want to keep an active credit history, a secured card can support your goals.
As with any tool, secured cards have pros and cons
- It’s a real credit card. Use the card at any place that accepts major credit cards. Unlike a prepaid card, you’re not drawing down deposited funds. Rather, you are using the card to borrow money at the terms established in your contract. The deposit covers the risk a card company takes when lending to you. Use your secured card anywhere you’d use any credit card. Manage the card responsibly and you’ll get the deposit back.
- You can rebuild credit. A secured card, unlike a prepaid card, reports your credit record to some or all of the major credit reporting companies, TransUnion, Experian and Equifax. This allows you to establish or rebuild your all-important FICO score and restore your credit.
- Easier to qualify. Not everyone qualifies for a secured card, but chances are good that you will, since approval rates are high. The requirements for these cards are much more forgiving than they are for major credit cards.
- Small credit limit. Usually your limit is about the same as your deposit. The point is to build your credit slowly and safely, so have patience with starting small. Credit scores take into account how you use your available credit.
- Cost. Some of these cards really pile on the fees. Fees vary a lot, depending on the card you choose. So shop carefully for the very best deal.
How Secured Cards Affect Your Credit Score
When you’re shopping for a card, be sure to choose one that sends your payment activity and account information to all three of the major credit bureaus – Equifax, TransUnion and Experian. This allows your credit score to benefit most from your credit usage and on-time payments.
Think of the card not as a convenience so much as a way to build credit. To get the most from it, it’s important to know how credit scores treat your usage and payment activity.
One credit score factor compares how much credit you’re using with the credit limit on your card. That’s called your “utilization ratio.”
To help build your credit, keep your utilization ratio low. Do that by carrying a balance that’s no more than 10% to 25% of your credit limit. Running up your card balance hurts your ratio, damaging your credit score.
For example, if your credit limit is $300, keep your balance under $75. If your limit’s $200, keep the balance under $50. If it’s $500, don’t go over $125. Note, though: you don’t have to run up debt to have good credit. It’s perfectly fine to pay your balance off in full each month.
Your payment history affects up to 35% of your credit score. Late payments bring down your score, while on-time payments keep your credit score healthy.