A secured credit card functions similarly to an ordinary credit card in many aspects. Your credit score can rise if you pay your bills on time and keep your balance low. Moreover, the reverse is true.
A refundable upfront security deposit is what distinguishes a secured credit card. The idea is to raise your credit score over time so that you can get more credit options, including unsecured cards. Here’s how to get the most out of a secured credit card.
1. Consider a secured credit card.
A secured credit card may be useful if:
You’re starting over when it comes to credit. Issuers of credit cards frequently set minimum standards for credit scores. You may have problems being approved for a conventional unsecured card if your credit file is weak or you don’t have any credit history. However, because the required deposit makes it simpler to qualify, a secured credit card might be a smart place to start. If used wisely, it can also help you develop credit.
Your credit is not good. Secured credit cards tend to have more lenient qualifying conditions, so you might want to look into them if getting an unsecured credit card is difficult due to a poor credit score. Having a good payment history and a low credit utilization rate will also help you raise your score over time.
2. Check Your Credit Score
Before applying for a new credit card, it’s a good idea to know your credit score because credit card issuers will review it to determine whether to approve your application. It can help you determine which cards you might be eligible for as well as potential interest rates. Being aware of your score can also assist you in avoiding applying for credit cards for which you might not qualify. This is crucial because applying for multiple credit cards at once may lower your credit score.
3. Choose the Right Secured Credit Card
Secured credit cards come in several varieties. When looking for the ideal card, bear the following points in mind:
- Annual fees: To maintain the account’s activity, certain card issuers impose a monthly or annual cost. The Consumer Financial Protection Bureau’s most recent statistics indicate that in 2020, the average yearly charge was $94.00.
- Annual percentage rates, or APRs: If you have a balance, the APR will inform you of your interest expenses. Interest rates on secured credit cards are typically higher—up to 30% in some situations. If you pay off your balance monthly, you can avoid this fee.
- Miscellaneous fees: Keep an eye out for additional credit card fees. Certain card issuers impose additional costs on cardholders, including application, processing, and foreign transaction fees. Please read the fine print.
4. Pay the Required Deposit
Your credit limit will probably be impacted by the refundable security deposit required for secured cards. Requiring a deposit lowers the card issuer’s risk. They will keep that money if you don’t make your payments. Minimum deposits needed vary; $200 is usually required, however, others just require $49. If you have the funds, you can make a larger down payment and potentially get a greater credit limit.
5. Start Using the Card
Secured credit cards function similarly to regular unsecured credit cards, with the exception of the security deposit. Your account balance will be increased by the transaction amount each time you swipe your card. When your monthly bill is due, you will have to pay the minimum amount due. Typically, this sum is determined as a percentage of the balance on your bill.
Every month, try to pay off your balance in full. By doing this, you can lower your credit score and prevent paying interest. Generally speaking, you should only use your secured credit card for regular purchases and essential bills. Why not receive credit for these purchases if you must make them anyhow? Make sure, however, that you only charge what you can afford to pay back each month. Remember that it may take up to two months for a secured credit card account to show up on your credit report after you receive it and begin using it.
6. Pay Your Bill Each Month on Time
The three main consumer credit bureaus (Experian, TransUnion, and Equifax) may receive reports about your payments from secured card issuers, just like from other creditors. In fact, you should look for a secured card that reports to these agencies so you may utilize it to establish credit. These payments will cover any negative information, such as late payments and large balances, as well as timely payments that show favorably on your credit report.
Your FICO® ScoreTM is based in part on your payment history (35%). A solitary late payment will also be on your credit record for a period of seven years. Maintaining account balances can be facilitated by setting up automatic payments.
7. Don’t Max Out Your Card
Ideally, you should pay off the entire amount on your credit cards each month. Try to keep your balance under thirty percent of your credit limit if you must carry a balance. You should maintain your balance under $300, for instance, if your credit limit is $1,000. Since credit utilization plays a significant role in credit score computations, going over that limit could lower your credit score. The benefit is that provided everything else is equal, any credit damage resulting from a high utilization rate should be repaired quickly after the debt is paid off.
8. Upgrade to an Unsecured Credit Card
After you’ve made on-time payments for a certain number of months, certain secured credit card issuers could automatically accept you for an unsecured card. Others will need an official application from you. Utilizing your secured credit card could also help you raise your credit score to the point where other issuers will provide you access to their unsecured credit cards.
You have the option to either close your secured card and receive your security deposit refunded or to leave it open in this situation. Examine your finances and the potential impact of canceling a secured card on your credit utilization rate before taking your next action.
The Bottom Line
One of the best ways to establish or enhance your credit is by using a secured credit card. You can eventually switch to an unsecured card with prudent use. Choosing the appropriate card is a crucial first step. Personalized credit card recommendations based on your credit profile are provided by Experian CreditMatchTM, which helps ease that portion a little.
FAQs Secured Credit Cards
• What Is a Secured Credit Card?
Want to build credit? One solution is a protected credit card. Secured credit cards are more accessible to those with bad credit and do not demand a security deposit.
• How Secured Credit Card Deposits Work
How does a deposit on a secured credit card operate? All the information you require concerning secured credit card deposits is provided here.
• Can I Increase My Secured Credit Card Credit Limit?
You can finally get approved for an unsecured card with the help of a secured credit card, but is the credit limit preventing you from doing so? This is important to know.
• Do Secured Credit Cards Build Credit History?
You can establish credit by using secured credit cards that are properly handled and reported to the credit bureaus. However, there are other actions you can take to improve your score.
• Is It Better for My Credit to Have an Unsecured or Secured Card?
Your credit may be harmed or helped by secured and unsecured cards. The way you use the card is more important than its kind. This is important to know.
• How long is a secured credit card good for?
If you intend to use a secured credit card to establish or restore credit, you should use it consistently until your objective is met.
• Best Secured Credit Cards of 2023
You can establish a solid credit history with the aid of secured credit cards. These are our best choices.
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