How to Build Credit With a Secured Credit Card

Updated: March 21, 2024

Updated: March 21, 2024

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Building credit using a secured credit card is a popular method for those new to credit or looking to rebuild their credit history. A secured credit card requires a cash deposit, which serves as collateral and usually determines your credit limit. This setup provides lenders with a safety net, making them more inclined to offer such cards to users with limited or damaged credit histories.

Over time, with consistent and responsible use — like making timely payments and keeping the balance low — a secured card can significantly improve your credit score. Many issuers also offer features like credit monitoring and the possibility to graduate to an unsecured card after a period of responsible usage. It's an excellent stepping stone for individuals aiming to elevate their financial standing and gain access to better lending opportunities in the future.

KEY TAKEAWAYS
  • Secured credit cards, backed by a cash deposit, help newcomers or those rebuilding credit establish a positive credit history through responsible use.
  • Regular on-time payments and maintaining low credit utilization (below 30%) are key factors in boosting credit scores.
  • Over time, responsible card use can lead to higher credit limits or the transition to an unsecured card, further enhancing credit opportunities.

How to Build Credit With a Secured Credit Card

Building your credit with a secured credit card is simple. These cards require a cash deposit as collateral, which sets your spending limit. If you make regular payments and use the card responsibly, your positive financial behavior gets reported to credit bureaus, boosting your credit score over time.

1
Choose the Right Secured Card

You have many options to choose from when it comes to secured cards. Start by researching various cards and focusing on those with low annual fees. Another key consideration is to ensure the card issuer reports to all three major credit bureaus: Equifax, Experian and TransUnion. This step ensures your efforts towards credit-building are recognized and reflected in your credit history.

2
Establish Good Payment Habits

Commit to exemplary payment habits once you've obtained your secured card. This involves two primary actions: always paying at least the minimum amount due by its due date and, if feasible, clearing the full balance each month. The former helps build a positive payment history, the most significant factor in credit scores, while the latter avoids interest charges.

3
Manage Your Credit Utilization

Credit utilization, the ratio of your card balance to your credit limit, plays a significant role in credit scoring. It's wise to keep this ratio under 30%. For instance, with a credit limit of $500, your balance shouldn't surpass $150. This demonstrates responsible credit management, boosting your creditworthiness in the eyes of potential lenders.

4
Monitor and Diversify Your Credit

It's important to regularly review your credit report to catch any errors and assess your credit-building progress. Fortunately, many card issuers offer free access to your credit score. Consider diversifying your credit types as your credit improves, like applying for a small installment loan or a retail store card. However, diversify wisely. While different credit types can enhance your score, managing them responsibly is essential.

5
Build Credit and Stay Informed

You may be eligible to transition to an unsecured card after responsibly using your secured card for a year or more. Some issuers could even automatically upgrade your card and return your deposit. As you progress in your credit journey, avoid excessive hard inquiries from numerous credit applications, as these can dent your score. Moreover, continue educating yourself on personal finance and credit best practices, ensuring you remain informed and adapt your strategies as needed.

How Much Can a Secured Credit Card Raise My Credit?

A secured credit card can significantly help build or rebuild your credit score, but the amount you score can increase by depends on various factors, including your starting point and how you use the card. Here's a more detailed breakdown:

  • Starting Point: If you're starting with no credit history, a secured credit card can help you establish a credit history, which is a crucial component of your credit score. If you're rebuilding from a low score due to past negative situations (like defaults, late payments or bankruptcies), the secured card can help counterbalance these negative marks over time with positive payment behavior.

  • Payment History: This factor contributes to about 35% of your FICO score. Making on-time payments consistently can have a positive impact on your credit score.

  • Credit Utilization: Your credit utilization ratio (how much of your credit limit you use) accounts for roughly 30% of your FICO score. Low utilization (under 30%) can help improve your score. For example, if your secured card has a $500 limit, try to maintain a balance under $150.

  • Length of Credit History: The longer you keep your secured card open and in good standing, the more it can positively affect the length of your credit history, which accounts for about 15% of your FICO score.

  • Credit Mix: Having a mix of different types of credit makes up about 10% of your FICO score. If your secured card is your only line of credit, its impact may be limited in this category. However, if it's complemented by other forms of credit (like an installment loan), it can help improve your credit mix.

  • New Credit Inquiries: This accounts for about 10% of your FICO score. Each time you apply for a new line of credit, it results in a hard inquiry, which can temporarily reduce your credit score. This is something to be aware of, but the impact lessens over time.

In practical terms, it's challenging to quantify the exact number of points a secured credit card can add to your credit score because credit profiles are complex, and everyone's situation is unique. However, many individuals have reported improvements ranging from several points to more than 100 points over time. This improvement largely depends on the factors mentioned above.

Remember, while a secured credit card can be a tool to help build or rebuild credit, using it responsibly is key. Consistent, positive credit behavior over time is the most reliable way to see a meaningful improvement in your credit score.

Best Ways to Use a Secured Credit Card

Building credit with a secured credit card is primarily about demonstrating responsible credit behavior over time. Here's how you can charge expenses to your secured card while minimizing the risk of carrying a balance:

1
Use it for Routine Monthly Expenses

Use your secured card for fixed, predictable monthly expenses. This can include: - Subscription services: Such as streaming platforms (Netflix, Spotify), magazines or software. - Utilities: Some utility providers allow you to pay bills with a credit card without added fees. - Cell phone bills: Pay your monthly mobile phone bill with the card.

2
Buy Daily Essentials

Buy day-to-day necessities like groceries or fuel. Since these are regular expenses, you're not adding extra spending to your budget, which should make it easier to pay off.

3
Set a Budget

Determine a monthly spending limit based on your income and other financial obligations. This will ensure that you have enough money to pay off your balance in full every month.

4
Set Up Automatic Payments

If you have recurring payments, like subscriptions, set them to be charged automatically to your secured card. This ensures consistency in usage, which can be good for your credit history.

5
Keep Credit Utilization Low

Ideally, try to keep your credit utilization (the ratio of your credit card balance to the card's limit) below 30%. For example, if you have a $500 limit on your secured card, try to maintain a balance under $150. Low credit utilization is seen favorably by credit bureaus and can positively affect your credit score.

6
Track Your Spending

Regularly monitor your credit card transactions, either through the card issuer's mobile app or website. This helps in ensuring you don't overspend and can identify any fraudulent charges quickly.

7
Set Up Alerts

Use the card issuer's platform to set up notifications for when you approach your predetermined spending limit or when you've reached a certain percentage of your credit limit.

8
Pay Multiple Times a Month

If you're worried about using too much of your credit limit, you can make multiple payments throughout the month. This keeps your balance low and ensures you're always in a position to pay in full.

Remember, the key to building credit fast is consistent, responsible behavior. Always paying your balance in full and on time, keeping credit utilization low and using your card regularly (but judiciously) will help improve your credit score over time.

Frequently Asked Questions

The FAQ section below find answers to some commonly asked queries about secured credit cards.

Is a secured credit card my only option if I have bad credit?
Will applying for a secured credit card further hurt my already poor credit score?
How much of a deposit will I need to provide for a secured card?
Can a secured credit card eventually turn into an unsecured card?
What happens if I can't pay off my secured credit card balance?
Is there a risk of owing more than my deposit on a secured card?
Do secured cards offer any perks or rewards like some unsecured cards?
Can I add to my deposit and increase my credit limit after I've been approved?
What should I do if my secured card application gets denied?
Can I get a secured card from my current bank or should I look elsewhere?

About Grace Pilling

Grace Pilling headshot

Grace Pilling was the Senior Content Manager for Credit Cards at MoneyGeek. She previously led personal finance teams at Bankrate, CreditCards.com and MoneyUnder30.

Pilling has a bachelor's degree in English from Western Sydney University and a diploma in book editing, proofreading and publishing. She is focused on empowering readers to make informed financial choices that support their best lives, not a company’s bottom line.

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