Here’s how secured credit cards help build credit

The information provided on this website does not, and is not intended to, act as legal, financial or credit advice. See Lexington Law’s editorial disclosure for more information.

A secured credit card is backed by a deposit, which enables lenders to provide secured credit cards to people with no credit history or bad credit. You can build your credit using a secured credit card by using your card regularly, paying off the full balance each month and keeping your credit utilization low.  

If you have no credit history or bad credit, it can be difficult to get a credit card or a loan. Without credit, however, you can’t start to build or improve your credit history. One way to build or improve your credit history is getting a secured credit card.

Unlike a traditional credit card, a secured credit card requires a cash deposit. As long as you pay off your balance, the deposit will be returned to you when you close the account. But if you don’t make payments on time, the deposit acts as collateral, and the lender will keep the deposit to pay what you owe. 

Read on to learn more about how secured credit cards work and how you can use one to build or improve your credit history. 

What is a secured credit card?

A secured credit card is similar to a traditional card in most respects, except that the card is backed by a cash deposit that lenders use as collateral. 

While lenders are typically hesitant to offer credit cards to people with no credit history or poor credit, a secured credit card is a low risk, since you are essentially borrowing money from your own cash deposit. If you don’t pay your bill, the lender can simply use your deposit to pay off the balance.

Here are a few key points to keep in mind with secured credit cards:

• Credit limit: The credit limit for a secured credit card is usually equal to the amount of cash you are required to provide as a deposit.
• Annual percentage rate: The annual percentage rate (APR), or the interest that you’ll accrue by not paying your full balance each month, is typically higher on a secured credit card.
• Goods and services: Similar to a traditional credit card, a secured credit card can be used to pay for goods and services, including many bills.

By using a secured credit card with good credit habits, you can build or improve your credit history to enable yourself to get a better credit card or a loan. 

How to use a secured credit card to build credit

Once you have a secured credit card, you can begin using it to build or improve your credit, which could ultimately lead to a better credit score and the opportunity to get a car loan or mortgage. Additionally, using a secured credit card responsibly may be a great path toward getting a regular credit card, which offers advantages like higher credit limits, rewards programs and better interest rates.

Keep the following in mind while using a secured card to build your credit.

Make sure your card issuer reports to the credit bureaus

There are three major credit bureaus that keep track of your credit history, so you’ll want to be sure your credit card issuer is reporting your payments so you can build your credit. 

Check your credit card agreement or call the financial institution offering you a secured credit card to ensure they will report your credit history to the credit bureaus.  

Use your card regularly

Your card will only make an impact on your credit report if you use it, so you’ll want to make regular purchases with your secured credit card. However, it is important to use your card responsibly, so aim for manageable purchases like groceries or small bills. 

Keep your credit utilization low

One of the factors affecting your credit score is credit utilization, which is the ratio between the credit available to you and the credit you’re actually using. In general, it is beneficial to try to use 30 percent or less of the total credit at your disposal.

Keeping your credit card utilization low signals to future creditors that you are a lower risk because you aren’t relying too heavily on your credit cards. 

Pay off your full balance every month

An important part of managing a credit card is paying off the full balance every month, which helps you avoid paying any interest or falling behind on payments, which in turn can lead to a negative item on your credit report. 

Advantages and disadvantages of secured credit cards

Secured credit cards can be a good option, but it’s important to recognize that they have drawbacks as well. Consider the advantages and disadvantages when deciding whether to get a secured credit card.

Advantages

• Enables you to build or repair your credit if you have no credit or poor credit
• Encourages responsible use of credit due to required cash deposit
• Is typically accepted everywhere a regular credit card is also accepted.

Disadvantages

• May be impractical for long-term use due to lower credit limits
• May have a higher interest rate, which can be problematic if you don’t pay the full balance each month
• May charge administrative fees

Overall, secured credit cards offer an excellent way to build credit, especially for those who have no credit history or poor credit. However, once you’re able to qualify for a regular credit card, it’s often beneficial to do so. Regular credit cards offer better interest rates and credit limits, and many also offer cash-back rewards. 

If you’re looking to get a secured credit card to fix your credit, make sure that you have taken a close look at your credit report for any inaccurate information that could be bringing down your score. 

If you need assistance formulating a solid credit repair strategy, consider consulting the professionals at Lexington Law Firm for help addressing and removing negative items from your credit report. 

Note: Articles have only been reviewed by the indicated attorney, not written by them. The information provided on this website does not, and is not intended to, act as legal, financial or credit advice; instead, it is for general informational purposes only. Use of, and access to, this website or any of the links or resources contained within the site do not create an attorney-client or fiduciary relationship between the reader, user, or browser and website owner, authors, reviewers, contributors, contributing firms, or their respective agents or employers.