How to Use a Secured Credit Card and Build Credit

A secured credit card serves as a stepping stone as you work toward improving your credit score. You can use one to build credit or to recover from damaged credit. 

What is a secured credit card?

A secured credit card looks and works like any other credit card. You can use it to make purchases that you pay for later. If you don’t pay off your entire balance by your payment due date, you'll pay interest on the unpaid balance. The key difference is that you need to make a cash deposit to get a secured card. 

With traditional credit cards, the lender is trusting you to pay the money you owe. It doesn’t take long to build this trust. In the meantime, if the lender isn’t sure whether you’ll pay your debt, because your credit score is low or you haven’t established a credit history yet, a cash deposit lowers their risk. 

How to choose a secured credit card

Secured credit cards come with varying fees and terms, so take the time to compare different options to find one that best fits your needs.

Fees you might notice include an annual or monthly fee, application fees, inactivity fees, statement fees, membership fees, and so on. Many secured card options don't have these fees, so those are the ones to look for. 

You also want to be aware of the APR (annual percentage rate), which tells you how much interest you'll pay if you carry a balance. Interest is an additional cost that the creditor will charge you if you don’t pay off your balance in full each month. If you don’t pay off your balance, interest makes your transactions more expensive. You can avoid interest altogether by paying off your balance each month in full.

If you want to build a good credit score, it’s important to apply for a secured credit card that reports your balance and payment history to the credit bureaus, Equifax, Experian, and TransUnion (all three if possible). If they don't report, then having the card won’t help you build credit.

Getting started with a secured credit card

Applying for a secured credit card is easy. Many issuers offer an online application process. You’ll need to provide personal and financial information. While some lenders may perform a credit check, others do not. Many secured cards are available to those with limited or poor credit.

Once you’re approved, here’s what comes next:

Make your security deposit

After approval, the credit card company will instruct you on how to make your security deposit. This is money you’ll have to keep on deposit with them for as long as you have the account. 

Most issuers allow you to link your bank account to complete the deposit online. Some may also accept mailed money orders or other forms of payment. Deposit amounts vary depending on the issuer. This amount will typically equal your credit limit, though some secured cards allow a higher limit.

Pay on time and in full

Building credit starts with responsible payment habits. Make it a priority to make your payments on time every month. Each bill will show the minimum amount you have to pay. If possible, it’s best to pay your balance in full whenever you can. That will save you interest charges and be good for your credit score.

Your payment history is the most significant factor in your credit score. Consistent, on-time payments will help you build a solid credit profile. 

Use your card sparingly

While a secured card offers more freedom to make purchases, it’s important to use it wisely. Spend within your means and avoid buying anything you can’t pay off each month. This not only prevents unnecessary debt but also keeps your credit utilization low. 

Credit utilization is the percentage of your credit limit that you’re currently using. 30% is about average, and the lower you keep it the better for your credit score. For example, if your card’s limit is $100, try to keep your balance below $30. To keep utilization even lower, consider making small payments multiple times a month.

Monitor your credit progress

Regularly check your credit report. This way you can track your progress and make sure your card issuer is reporting your activity to the major credit bureaus. Monitoring your credit helps you stay motivated and can highlight areas for improvement. It also allows you to catch any errors that might negatively impact your score.

By following these steps, you’ll be well on your way to building a healthier credit score. That could eventually qualify you for an unsecured credit card.

How to use a secured credit card and build credit

A secured credit card can help you build or rebuild your credit over time. The key is to practice good habits that show lenders you can manage credit responsibly.

Start by making small, manageable purchases. Consider using your card to buy things you already buy regularly. That way you won’t be increasing your spending. For example, use your card to pay for a monthly subscription you already have or essential expenses. 

Note the due date for each bill, and make your payments promptly. Always aim to pay off the balance in full every month to avoid interest charges. This habit not only saves you money but also helps you establish a positive payment history. Payment history is the biggest factor in building your credit score.

Keep your spending low by using less than 30% of your credit limit. This helps maintain a healthy credit utilization ratio, which also plays a significant role in your credit score. 

Making on-time payments and keeping your balance low should gradually improve your credit. Over time, this responsible behavior can help you qualify for an unsecured credit card and open up more financial opportunities.

When do you graduate from your secured card?

After a period of use and on-time payments, some banks will convert your account to an unsecured credit card automatically and return your deposit. If your credit card issuer doesn’t do this, you may be able to apply for an unsecured card after 6 to 12 months of on-time payments. 

At that time, look for a starter card. They’re easier to get approved for. Capital One and Discover are known for traditional (unsecured) credit cards that are designed for students and others with limited credit history. Once you get an unsecured card, you can close your secured credit card account and request the return of your deposit. You’ll need to pay off any outstanding balance first.

Pros and cons of secured credit cards

Secured credit cards can be a great option if you're looking for a way to get your credit score on the right track and establish a good credit history. There are some amazing potential benefits of using one. These include:

• Secured cards are an effective way to build or rebuild your credit history and credit score

• Almost anyone can get a secured card 

• With on-time payments, you can graduate to an unsecured card in a matter of months

Secured credit cards aren't without their downsides. These include:

• You'll need to put down a security deposit

• Some secured cards have fees 

• Secured cards tend to have low credit limits