Do Secured Credit Cards Help Your Credit?
Disclaimer: this blog post may have affiliate links, which means we may earn a small fee (at no cost to you) if you make a purchase or apply for a credit card offer.
If your credit isn’t great, you might be searching for quick methods to improve it. In that case, secured credit cards could be the solution you need. Secured credit cards can aid in building your credit if used correctly, particularly if you’re able to upgrade to an unsecured card later.
In this article, let’s look at what a secured credit card is and how it can help build your credit.
What Is A Secured Credit Card?
A secured credit card offers many similar features and protections as a standard credit card. The difference is that it requires a security deposit upfront. This is because if you have poor credit or a limited credit history, lenders might view you as a risky borrower.
By putting down a security deposit, you provide some assurance to the lender in case you fail to meet your credit obligations. And if you handle your credit line well, you will receive your security deposit back in full.
The amount of your security deposit can vary. Some secured credit cards might let you start a credit line with a deposit as low as $50. However, most cards typically require a deposit that matches your credit limit.
For instance, if you want a $500 credit limit, you would need to deposit $500. So, you need to keep this in mind when choosing the best secured credit card for your needs.
Secured credit cards are commonly used to improve credit scores. These cards usually have low credit limits and high interest rates. They can become unsuitable for financing big-ticket items and costly if you carry a balance.
Secured Card Vs. Unsecured Card
When choosing between a secured or unsecured credit card, it’s helpful to check your credit score first to decide which option is best for you. It’s also important to understand the key differences between these two types of cards:
Secured credit card:
- Lower qualification requirements: Easier to get approved, even with poor credit.
- Lower credit limits: Typically offers smaller credit limits.
- Requires a security deposit: You must pay a deposit upfront.
Security deposit functions: The deposit covers potential unpaid debts and determines your credit limit.
Unsecured credit card:
- Higher qualification requirements: Approval typically requires a better credit history.
- Higher credit limits: Generally offers higher credit limits than secured cards.
- Does not require a security deposit: No deposit needed to open an account.
Potential for high fees and interest charges: Late payments can result in substantial fees and increased interest rates.
Typically has a higher APR: Often comes with a higher Annual Percentage Rate compared to secured cards.
Pros And Cons Of Using A Secured Credit Card
Pros:
Quick credit building: Can help build or rebuild credit in as little as two months.
Opportunity to graduate to an unsecured card: Issuers may upgrade you to an unsecured card after a period of responsible usage.
Refundable deposit: Your deposit is returned as long as you repay your balance in full.
Easier qualification: More accessible for those with credit challenges.
Cons:
Requires an upfront cash deposit: You must pay a deposit to activate the card, which can be financially restrictive.
High fees and interest charges: Missing payments can lead to significant fees and increased interest rates.
Low credit limit: Generally, these cards offer limited spending power.
Higher APR: Often comes with a higher Annual Percentage Rate compared to unsecured cards, increasing the cost of carrying a balance.
How To Use A Secured Credit Card To Build Credit
Using a secured credit card effectively can be a great way to build your credit. To help you achieve this, here are key steps to follow:
Use the card moderately: Limit your use of the card to one or two minor purchases each month. Ensure your balance does not exceed 30% of your credit limit. For optimal credit score improvement, aim to keep your balance below 10%. Remember a high credit utilization can decrease your credit score.
Pay off your balance monthly: Always pay your entire balance before the due date. This practice avoids interest charges, which can be significantly higher on secured cards compared to unsecured ones.
Monitor your credit score: Regularly check how your credit score changes. When you notice a substantial improvement, contact your card issuer to discuss the possibility of transitioning to an unsecured card. This step can further enhance your credit profile and financial options.
How Quickly Can A Secured Card Build Credit?
The timeline for building credit with a secured card can vary significantly based on individual credit histories. Here’s a general overview:
Starting with no credit history: If you are beginning with no credit, just being approved for a secured card starts building your credit profile. Your on-time payments should appear on your credit report within about two to three months. However, obtaining an initial credit score might take around six months.
Rebuilding from bad credit: If your credit history includes significant negative events like foreclosure, bankruptcy, or defaults, improving your credit score might take longer. This could be from a few months to several years. The impact of these negative items diminishes over time. And they will eventually age off your credit report after seven to ten years.
Regular, responsible credit behavior during this period can help increse the improvement of your credit score.
In both cases, consistent on-time payments and responsible credit management are key to building and improving your credit score over time.
Don’t Have A Secured Card? Here Are Cards That Often Accept New And Bad Credit In Place Of Secured Cards
Summing It Up
Secured credit cards provide you with a valuable opportunity for building or repairing your credit. Despite requiring a deposit and offering a lower credit limit, these features can actually help prevent further damage to your credit.
By making small, manageable purchases and consistently paying them off, you can significantly enhance your credit history. This steady approach can eventually lead you to qualifying for an unsecured credit card.
