How to Use a Secured Card to Build Credit
Getting approved for your first credit card feels like a catch-22—it’s hard to get credit if you don’t already have it. That’s where secured credit cards come in. If you are starting to build your credit for the first time, or looking to rebuild after past credit challenges, a secured credit card is likely your best tool.
What is a secured credit card?
In practice, a secured credit card works just like any other credit card (AKA unsecured credit card)—you swipe it for purchases and pay your bill at the end of the month. However, there is one major difference: a secured credit card requires a deposit. The deposit is typically between $200-$500 and that becomes the credit limit on the card. In other words, the credit card company is essentially loaning your own money back to you. This greatly reduces the risk to the lender because your purchases are “secured” by the deposit you gave the bank; if you don’t pay your bill, they will keep your deposit.
How does a secured card help your credit score?
The most important factor in your credit score is your payment history (i.e. making on-time payments) and a secured card allows you to start building that positive payment history. Every month that you use the card and pay at least the minimum on it, you get a nice check mark on your credit report. The more of those check marks you rack up, the more likely you are to eventually get approved for other credit such as a car loan, mortgage, or a great rewards credit card.
What should you look for in a secured credit card?
You want your secured card to be beneficial in both the short and long term. Here are a few things to look out for:
No monthly fee: You’ll want to keep your first credit card open indefinitely and paying a monthly fee for the privilege of borrowing your own money gets old fast, so find a secured card that does not charge any monthly maintenance fees.
Affordable deposit: Because you will need to front your own cash to get a secured card, make sure that the deposit amount works for you. If you can’t afford to set aside $500 right now, apply for a secured card with a $200 limit instead.
What are the best practices for using a secured credit card?
Once you’re approved for your secured card, there are a few things to do to set yourself up for success:
Put a small recurring charge on the card
Once you have your first secured card, you may be tempted to start using it for your day-to-day expenses. However, this can impact the second biggest factor in your credit score: your credit utilization (i.e. how much of your available credit you’re using each month). Putting only a $5-$15 monthly charge on your card ensures that your utilization stays low.
Set up automatic payments
Don’t rely on your memory to pay your bill—set up auto-pay! This will ensure that you never accidentally have a missed or late payment, two things that can really drag down your credit score. Plus, that’s one fewer item on your monthly to-do list!
Pay your statement in full each month
Rather than paying the minimum, pay your statement balance in full each month so you don’t rack up any interest. This is the best way to build credit habits that will continue to serve you in the future when you get an unsecured credit card.
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