Have you ever wondered how you can build credit with a secured card?
In this article, we will:
- provide tips for building credit with a secured card
- show you how to improve your creditworthiness and eventually get better credit card offers
- talk about the pros and cons of using a secured card as well as what to do if your application gets denied
Before jumping to our secured credit card tips, let’s start by understanding how secured cards help build credit.
What is a secured credit card and how does it help build credit?
A secured credit card works like a traditional card except that it’s backed by a security deposit when you open the account. Secured credit card providers report your payments to the three major credit bureaus, which use the information to create credit reports on your financial performance. Using a secured card allows you to raise your credit score fast using its easy terms, low balance requirements, and other perks.
What to consider before applying for a secured credit card?
Before you apply for a secured credit card, prepare the following things in advance. Knowing this information will help you find the best card options for you.
- Your credit score: Check your credit score and consider how much you want to raise it. Part of that is knowing what influences your credit score. This includes your payment history, financial performance, etc.
- Your payment history: the card provider will check your payment history to see whether you have a reputable financial record.
- Security deposit: check if you can shoulder the security deposit to avoid doubling back upon reaching the end of the application process only because of the deposit.
- Your income: your income gives the provider an idea of how much credit to give you. This is also an eligibility requirement.
Tips for building credit with a secured card
Building credit may be difficult for many people, but secured cards help ease the process. The following tips will help you understand how you can build your credit score using a secured card.
Explore the markets and compare
Building credit with a secured card starts with you knowing your options. When comparing, it’s important to understand the following:
Security deposit required
Secured cards require initial deposits that may be hefty for your budget. Therefore, you must know which cards fit your budget well and which ones may not be ideal if you don’t have money to spare. A secured credit card deposit may be between $200 and $300, although some can be much higher.
This refers to the maximum amount you can borrow from your line of credit. When using secured cards, your limit is often equal to the deposit you’ve made, which may not always be enough. Check each offer to find the best secured credit cards that provide sufficient credit for your needs.
Interest and Other Fees
You have to make a secured credit card payment yearly, and there are other fees associated with using the card. Be sure to compare APRs and fees when looking for secured cards to use.
Knowing how to fix your credit score starts with understanding how it is formed. Major credit bureaus collect your financial information and send it to lenders, who use the information to decide whether or not to approve your application. When searching for secured credit cards for bad credit, make sure the lender reports your payments to all three credit bureaus.
Types of Credit Checks
Entities that issue secured cards always check your credit history using either a soft or a hard credit check. A soft credit check occurs when an entity reviews your credit report to preapprove an application, and it doesn’t affect your credit score. Meanwhile, a hard credit check occurs when a lender enquires from one or more major credit bureaus in relation to a credit application, and this type of check affects your creditworthiness.
Transfer to Unsecured Card
When you know how to use a secured credit card to build credit, you’ll be able to access better card options, such as transferring to an unsecured card. These cards don’t need deposits, and they offer more flexibility.
Rewards and Benefits
When comparing cards, check which one gives you the best benefits and rewards. Common benefits and rewards include a $0 annual fee, low APR, discount bonus, and rebates.
When you want to build credit with a secured credit card, make sure that you’re dealing with a reputable card provider. A trustworthy provider makes building credit with a secured card easier and more rewarding.
Apply for a secured credit card and pay the deposit quickly
After selecting the best card provider, apply for their card offers. Make sure to fill out all forms properly and provide all the necessary documentation.
Make the deposit quickly because some lenders impose a security deposit timeframe. If you fail to meet this timeframe, your card approval will be withdrawn.
And because most secured card providers report to credit bureaus, any late deposit or balance payments will be recorded. Thus, they can also affect your credit score, so make sure you know how to use a secured credit card wisely.
Once approved, use your secured credit card responsibly
Using your credit wisely doesn’t mean that you won’t use the money. Instead of avoiding it altogether, use it regularly to show financial activity.
You must, however, stay within the ideal credit utilization ratio, which is the amount you use versus your credit limit. Keeping this ratio low will tell lenders that, while you’re regularly using credit, you’re doing a good job of keeping it at a reasonable level.
Don’t max it out, either. If you do and fail to pay the balance in full, your credit score will suffer.
Make payments on time
Keep a timely secured credit card payment schedule. This helps you keep a great payment history, which is always good for your credit.
Making payments on time also establishes that you’re responsible, and this can reflect positively on your credit reports from the three major credit bureaus.
To help yourself make regular payments, it’s best to avoid high interest fees. Consider some of the best no interest credit cards that providers offer.
Monitor your credit score
Once you learn how to properly use a secured credit card to build credit, check your credit score regularly. You can request a free credit report once a year from each of the three major credit bureaus. This means you have three free reports a year — use them wisely.
The average credit score in the US is between 688 and 711. You can use this as a benchmark of progress. If you see progress in your score, transfer to an unsecured credit card, which offers a ton of benefits for borrowers.
If you don’t see any progress, check for problems and aim to resolve them immediately. There might be an error in the reporting process, or your financial habits still need tweaking.
What do you need to provide in order to get secured credit cards? The following are some important eligibility requirements you should consider:
- Have a bank account: although not technically a requirement, having a bank account inspires confidence and trust that you’re financially capable.
- Have at least $200 or more in your account: the bigger the amount, the more the provider and/or lender will trust you. You can also use the money to make the security deposit before approval.
- Have no outstanding fees: make sure that you don’t have any pending payments of unpaid interest fees.
Other common requirements include being of legal age, having a US mailing address, and providing your Social Security number.
Pros and cons of secured credit cards
Secured credit cards have many advantages and some downsides. The benefits of a secured credit card include:
- Easier to get: secured cards are easier to get hold of compared to traditional ones. As long as you meet the eligibility requirements and make a security deposit, you’re good to go.
- Build credit easily: secured cards are a go-to method of building good credit. You can also use them to re-establish your credit history if you’ve suffered financial hardships in the past. Our tips for building credit using a secured card can help here.
- Reporting to credit bureaus: in relation to building credit, your payments are reported to the major bureaus. This means you have a chance to strengthen your credit history as long as you know how to use a secured credit card in a smart way.
- No collections: providers will use your security deposit as collateral. You don’t have to worry about debt collectors since your account won’t be sent to collections if you default.
On the other hand, watch out for the following drawbacks:
- Security deposit: if you can’t pay the security deposit, it might be impossible to get a secured card without incurring further debt.
- Additional fees: there might also be some fees you must be aware of, such as an interest fee or a late payment fee. These add up and can be costly if you’re not careful.
- Higher rates: speaking of additional payments, secured credit cards can have higher interest rates than others. If you have outstanding debts, credit card consolidation loans might be a better option.
What if you get denied?
When it comes to secured credit cards and credit score levels, the possibility of getting denied is always present. Here are some things you should remember if your application gets rejected:
- Don’t submit multiple applications: if you get denied, avoid submitting more applications since they can hurt your credit score further.
- Get a cosigner: a cosigner is a person with a better credit history who pledges to take responsibility in case you default. Getting one may help your application get approved.
- Be listed as an authorized person: if you have a relative or friend that has a credit account, you can ask to be an authorized person on their account.
You can try other alternatives, too, such as applying for a credit builder loan, which also helps you raise your credit score if you have little to no credit history.
The best way to build credit with a secured credit card is to make regular payments and keep your utilization rate at or below ideal levels. So, before applying for one, it’s best to compare markets and providers. Always weigh the pros and cons of your options. Monitor your progress by checking your credit score regularly.
Know whether you can switch to secured cards, and if there are problems, immediately take action to solve them. You can also check for alternatives should you get denied or if using secured cards fails to raise your credit.
Secured credit cards are one of the best ways to improve your credit score fast if you can’t get traditional cards. Payments are easy to make and there aren’t many obstacles to getting an application approved. The payments are reported to credit bureaus, too.
There’s no set time to keep a secured credit card. On average, however, secured card users can raise their credit scores within a year. You can check your credit score regularly and see if you’ve become eligible for an unsecured credit card.
Yes, you can. You can apply for more than one secured credit card from a single issuer or bank, but you should also consider the pros and cons of doing this. Keep your utilization ratio low for both cards and ensure you can make regular payments to avoid any problems.
Yes, you do. The deposit you make on a secured card is fully refundable as long as you pay your balance in full. You can get the deposit back when you move on to an unsecured credit card. However, the deposit is used as collateral if you default.
On average, users transfer to unsecured credit cards after improving their credit score. When they have a better score, they become qualified for unsecured card offers. You can use our smart tips for building credit with a secured card to accomplish this.