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Home » Credit, Credit Cards, Debt Management

How to Use a Secured Credit Card to Build Credit

Last updated by on June 13, 2016

With tighter lending restrictions these days, a lot of younger people in college and new graduates are having a hard time getting approved for credit cards or loans of any type. And because they aren’t able to access credit in the first place, it creates this cycle of not being able to improve their credit score and getting turned down for credit time after time.

This is a very common problem. In fact, I get the “how do I build credit when I don’t have any?” question almost as much as any other here at 20somethingfinance. Fortunately, there are a few ways to build your credit report and credit score – and one of them is through a secured credit card.

What is a Secured Credit Card?

secured credit cardSecured credit cards are commonly used as a way to build your credit and prove to creditors that you are a safe bet in the future. To understand what a secured credit card is, you first need to understand what ‘secured debt’ and ‘unsecured debt’ are.

Secured Debt

Secured debt is debt that you back up with collateral – a possession that can be taken from you. If you do not make your payments, you may lose the possessions that you purchased via this debt and be subject to other legal action. Auto loans or mortgages are two examples of secured debt. If you do not pay off your debt, each could be taken from you to pay off your debt.

Unsecured Debt

Unsecured debt is debt that has no collateral behind it. This includes all credit cards excluding secured credit cards. If you don’t pay off your debts here, you may be harassed by creditors and bill collectors the rest of your life, but they have little power other than ruining your ability to receive secured debt at good rates in the future. It is hard to get approved for unsecured debt if you have no credit history or have a bad credit score because of this reason. And it’s for that very same reason why those with poor credit scores are usually charged higher rates – because they are higher risk.

Back to secured credit cards.

How do Secured Credit Cards Work?

In the case of secured credit cards, your collateral is your cash. Much like a debit card or checking account, you must deposit funds into a secured credit card account. If you do not pay your bills, those funds can be taken from you to pay off the balance. The amount that you deposit becomes your credit line for the secured card. Other than that, there is no big difference between an unsecured credit card and a secured one. They can be used in the same way, and they have the same Visa or MasterCard logos.

Because you have backed up your purchases with collateral, secured credit cards are extremely easy to obtain and get approved for so that you can build your credit. Most secured credit cards will report your activity to the three credit bureaus on a monthly basis.

Another interesting thing to note about secured credit cards is that most offer interest on your collateral. It’s usually a nominal amount, similar to what you might get for a savings account, but better than nothing!

What is the Difference Between a Secured Credit Card and a Debit Card?

The difference between a secured credit card and a debit card is that funds are not deducted from your cash deposits with secured credit cards like they are with debit cards. Just like with unsecured credit cards, you must pay off a monthly balance and interest could be charged if you do not. This is not the case with debit cards. Also, you cannot build a credit history with a debit card – a key differentiator.

You will not be debited simply for missing one or two payments. Usually the deposit is only used as an offset when the account is closed, either at the request of the customer or due to severe delinquency (150 to 180 days).

How to Use a Secured Credit Card

Secured credit cards are still credit cards. And because of that, they are inherently dangerous to use because of the high interest rates involved. Remember, the point of a secured credit card is to build your credit – not encourage irresponsible purchasing behavior.

As with all credit cards, you should pay your balance in full every month so as to not incur any interest charges. And use your credit card as you would your cash. Don’t let the ease of the swipe negatively influence your spending habits.

Comparing Secure Credit Cards

When shopping for a secured credit card, here are a few guidelines to follow:

  • Shop around. There is a wide variety of cards, and you should only get one from a reputable issuer. There are a number of shady secure credit card issuers out there that pray on those with poor or no credit, so be careful.
  • Many secured cards charge an annual fee, but increasingly more do not.
  • You should never be charged interest if you are using your card appropriately, but you should still shop around for a reasonable APR that compares to unsecured credit cards.
  • You should not have to sign up for any additional services or fees.

Secured Card Discussion:

  • Have you used one to build your credit?
  • What other tips do you have for building credit when you don’t have any credit or have poor credit?

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About the Author
I am G.E. Miller, & this is my story. My goal is financial independence ASAP. If you share that goal, join me & 10,000+ others by getting FREE email updates. You can also explore every post I have written, in order.

  • Jessica Bosari says:

    My advice: If you simply have no credit history and are looking to build one, you’ll probably be clear to apply for a traditional card in three to six months. If you are using secured credit cards to rebuild credit after a bankruptcy or other poor credit even, hold it for 24 months. As long as you pay on time every time, you should qualify for a traditional card after 24 months. Just watch those interest rates!

  • Sandra says:

    I recenlty got a 1st premier bank credit card, I haven’t had anything negative happen yet, although i have been paying my min payment on time, anyone know of anything about this card that I should be aware of.

  • Peter says:

    I love to use the secured credit cards more than credit cards. They are easy to manager my money.

  • Mark says:

    Secured credit cards are great. I used one to raise my credit score from a 580 to a 692 within 3 months. It allowed me to get approved for a home loan.

  • phil says:

    I heard that paying your balance of in full dosnt help your credit score as much as it would if u left a small balance.otherwise your just useing it as a debt card.Is this true

  • kelly says:

    After some unfortunate events my almost perfect credit score is now below par (it makes me sick to even say that, I worked hard my whole life to keep a great score and within one year it was all washed away). All of the things that brought my score down are now in the past (going on a year)and I’m looking to rebuild. My score has been going up slightly but I’m a stay at home mom and my husband is the bread winner so I have no income to show which I think may be one reason my score isn’t moving very fast. I’d like to get a secured card to help bring up my score. I’m nervous about what card to use; can you please offer one or two reputable companies?

  • Sancho Sanchez says:

    I just want to know if I got a credit line for 300 how much should I spend monthly and how many times should I use it does it affect me in any way thanks if anyone has answers.

    • Don says:

      Basically they say your credit utilization should be under 30%. So for $300 that’s $90 of your available credit. Lots of people, myself included, have seen scores rise quickly by following this model. I use my card for gas and maybe a few meals and then pay it off.

      Some people think that they can make their utilization look low by just paying things off when they get the bill, but the thing is, banks can report your current balance at any time. So it’s best to usually just use the card for small things. But the most important thing of course is payments. Just never miss a payment and you should be fine.

  • Don says:

    A secured credit card saved me. I kick myself for not jumping on one earlier. Now keep in mind, everyone credit situation is very unique and there are sooooo many different variables and factors that go into these scores.

    But in my situation, I had a credit score in the mid 500s. Have only had 2 credit cards. One had a horrible payment history, payed off and closed. The second one also had a bad payment history and then a charge off with capital one. After that I went a few years without any credit.

    I got a secured card with a 500$ limit only using about 1%-20% of the credit most of the time except for when I needed to secure a car rental or hotel or something that needs a credit card. Would pay it off and rarely carried a balance. No point paying interest on your own money ya know.

    Anyway, within a few months my score jumped like 100 points. Now not everyone can expect this, because like I said everyone credit situation is different. I’m guessing that even though my score was super low, it must have been easily repairable. My only regret was not working on building a good history much earlier

  • Dan says:

    I’m confused about one thing. I’m going to follow the %30 rule but do I immediately pay off what I charge or wait for the bill. Also I was told to pay in full plus add 5 or 10 to add to my credit line… Any advice?

    • Don says:

      Not 100% on this but it seems that 1%-20/30% utilization is best. Better than 0% which makes it look like you are not using the card.

      For me, I use whatever utilization I want monthly, but in the middle of the month or close to the statement closing date I pay it down to 5-10% and then pay the rest off when the bill comes. My utilization has always been reported low.

      My best advice is to google when your card reports or call and ask, if someone can’t answer it for you try again. Most cards report when the statement day but some report on the last day of the month and others anywhere between the 10th and 20th of the month. So best to find out so you do not get caught with a high balance.

      As far as adding 5 or 10 to credit line just by paying more, I am not sure about that. With my secured card, I have to call them and let them know I want to increase the credit limit

  • Dee says:

    I have a secured cc for 200 through c1 I made a purchase for 19 dollars then paid it off as soon ambi got my statement it now says 180 available credit I’m trying to raise my credit do I just keep making small purchases and paying them off until it’s 0 credit left I’m confused what to do next


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