How to Build Credit with a Secured Credit Card

editor@creditsesame.com'/
credit-card-management

“The only things certain in life are death and taxes.” Well, that might have been true in Benjamin Franklin’s day, but in the 21st century, you might as well add credit cards to that list. Some places, like hotels and car rental agencies, require a credit card, even if you plan on paying cash. However, if you’re new to credit or want to rebuild your credit after a major life event, like a divorce or job loss, you may not be eligible for traditional credit cards but you may be able to acquire a secured credit card instead.

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1. What is a secured credit card?

A secured credit card is somewhat similar to a debit card but instead of being tied to your checking account, it’s tied instead to a cash deposit you’ve made to “secure” the card. If you put $500 into a deposit account with the card issuer towards collateral for the secured credit card, you generally will have a $500 credit limit, or your credit limit may be a percentage of that $500, your credit limit is still determined by the card issuer. So why go with a secured card? Because unlike debit cards, the companies that offer secured cards generally report to the three major credit bureaus, so on-time payments and good money management behavior will help you build your credit. If you create a history of managing your account responsibly, certain card companies, may even increase your credit line automatically without additional deposits.

2. Where can I get a secured credit card?

About half of the nation’s credit unions offer secured cards, so if you’re a member of a union, that’s a good place to start. One drawback with credit unions is that many only report to one credit bureau and if you’re looking to establish or rebuild your credit, you’ll want to make sure the card is reported to all three credit bureaus. If you’re not a member of a credit union or your credit union doesn’t offer a secured credit card, check out CreditSesame’s list of secured credit cards from our partners and see if any of those are a fit for you.

3. How much will a secured card cost me?

As with any credit card it pays to read the terms, rate information, conditions and fine print. Annual fees, application fees, and monthly charges can eat away at your balance, so make sure you shop around to find the best deal. Also, some things, like the application fee, are occasionally negotiable… so, you may want to give it a try and negotiate.

4. How much is the normal deposit?

Secured credit cards normally require an initial deposit in the range of $200-$2,000. This deposit amount will determine your credit limit, and over time, you may build unsecured credit on top of that.

5. Do all secured cards report to all three credit bureaus?

Having a credit card goes far beyond being able to buy shoes online. The most important part is that you’re building credit, and this can only be done if the issuer is reporting your payments and other factors to the credit reporting bureaus. Some will not report, some will only report to one, and others send your information to all three. If you start receiving mailers from other credit cards after several payments, this is an indicator that they do report; however, it’s best to read carefully through the terms and conditions – or simply ask the issuer up front –and choose a card that does report and ask your card issuer how they will flag the reporting and what that means.

6. How long will it take me to qualify for a regular credit card?

If you manage your new secured credit card impeccably, the credit card issuer will want to keep you as a customer. Typically after a year of good credit card management, the issuer will automatically initiate your move to unsecured credit. If after a year your issuer does not automatically upgrade your account to a traditional unsecured credit account, give them a call and ask them to do so.

7. What happens to the deposit?

Whatever money you put down as a deposit gets put into an account of your choice, usually a savings account, money market or certificate of deposit. You will earn the same amount of interest on this deposit as you would if you had put it in a normal bank account. After you close your secured credit card, the deposit will typically be held for a couple of billing cycles to cover any stray charges. Ask the issuer for exact time periods. After any fees or charges have been deducted the card issuer should return any remaining balance of your deposit to you.

8. What are the best ways to use a secured card to build credit?

Just like with an unsecured credit card, you’ll want to pay on time and keep your revolving utilization – the proportion of your balance in relation to the credit limit – as low as possible. Using the card regularly and paying in full will also show that you are a good credit risk. However, advisers warn to shed your secured credit card as soon as possible for unsecured credit. Even though secured cards may seem safer and encourage savings, because of the secured cards tendency to have annual fees and higher interest rates, you may find an unsecured card with better rates and terms. So, use the secured credit card as a stepping stone to build credit and learn responsibility, then move on.

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Published July 16, 2012 Updated: March 25, 2016
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