How Do Secured Cards Help You Improve Your Credit Score?

Secured credit cards are designed to help individuals improve their credit history and score. However, these cards differ from traditional unsecured cards in a few ways, and it’s important to understand all the details before you apply for a secured card.

What Is a Secured Credit Card?

A secured card is one with a credit limit that’s secured by collateral you put up. In the case of these cards, the collateral is a cash deposit you make to secure the credit limit. Typically, your credit limit is equal to your deposit, and you may have an option for how much that is.

For example, some cards allow you to deposit $200 to $3,000 to open your card account. So if you choose to deposit $500, your credit limit will be $500.

Your deposit is held by the credit card company the entire time you have the card. If you fail to make payments on your balance in a timely manner, the credit card company may close your account and use the deposit funds to cover its losses. This reduces risk for the lender, which is why these card companies are willing to offer credit cards to people with no or bad credit.

Once you close your account—assuming you’ve paid off your balance—you get your security deposit back.

Other than the factors surrounding the security deposit, a secured credit card typically works like any other credit card. You can use it to pay for purchases anywhere it’s accepted—these are usually Visa or Mastercard cards, so they’re accepted widely. If you carry over a balance each statement cycle, you’ll be charged interest on it in keeping with the rates associated with your card.

Building Credit With a Secured Credit Card

Secured credit cards aren’t a magic elixir for your credit. You have to manage these accounts appropriately to get the benefits. Here are some tips for building credit with a secured credit card.

Don’t apply randomly for credit cards. Every application could result in a hard inquiry on your credit report, bringing your score down further. Instead, do your research. Check your own credit, and consider what type of credit the lender is looking for before you apply. That increases your chances of getting approved the first time.
Make sure the cardholder reports your payments. Credit card companies don’t actually have to report your payments—so some won’t report to any bureaus, while others report to just one or two. Ideally, you want to work with a secured credit card lender that will report to all three credit bureaus. That way, your timely payments can help you build your credit on each of your credit reports.
Make every payment on time. Failing to make a payment can result in a negative mark on your credit reports, which defeats the entire purpose of the card. It can also result in hefty missed payment fees, which increase your balance even more.
Don’t max out your credit limit. Try to keep your utilization below 30%. That means if you have a credit limit of $1,000, keep your balance at $300 or lower. Your credit utilization—how much of your credit limit you use—impacts your credit score.
Don’t expect your credit to improve immediately. It takes time to build your credit via any means.

Tools like our Credit Report Card can help you keep track of your credit score and the factors affecting it so you can make good and informed decisions when building credit.

How to Choose a Secured Credit Card

When shopping for a secured credit card, consider the following factors:

Likelihood of approval. Don’t apply for a card you know requires good or excellent credit if you have poor credit. That just creates unnecessary hard inquiries.
Annual fee. You want to pay as little as possible for the benefit of building your credit. A few secured credit cards have no annual fee, but most do. Look for options with the most competitive annual fees, which tend to be under $40 per year.
Credit reporting. The best secured credit card options are those that report to all three credit bureaus. Plenty of secured credit card companies do, so you don’t have to settle for one that doesn’t.
Competitive interest rates. Rates for bad-credit products tend to be higher than average in general. However, you can find secured credit cards with more competitive rates, and you should definitely compare these cards to each other to find the lowest possible rate.
Account management tools. Look for a card lender that makes it easy for you to manage your account well. Payment reminders, online portals and apps can keep you in the know about your balance and reduce the risks you’ll miss a payment.

Next Steps After Using a Secured Card

Once you’re approved for and start building credit with a secured card, continue to plan for your financial future. At some point, hopefully, your credit will improve enough that you qualify for cards with better rates, limits, and perks.

Once you establish new cards, you might consider closing your secured credit card account because you may not want to keep paying an annual fee on a card that no longer serves your needs. However, closing your account might hurt your credit by potentially increasing your credit utilization ratio and also by affecting your average credit age, so weigh the pros and the cons of closing your card before making a choice. Visit Credit.com to learn more about our products like ExtraCredit® that could help you stay on top of your credit.