How Do Secured Credit Cards Help Build Credit?

If you have no credit or bad credit, it may be more difficult to get access to things like loans with low interest rates. However, there are steps you can take to help your credit score grow. One way is to use credit responsibly, and secured credit cards are often recommended as one avenue for getting access to credit with even a poor credit history.

So, how exactly does a secured credit card work? What can you expect to see from using one wisely? We share what you need to know about this popular credit-building tool.

Do secured credit cards help you build and repair your credit?

Yes, if used wisely, some secured credit cards can help you reestablish your credit. It's important to note that not all secured credit cards report to the three credit reporting agencies. To know for sure, check the terms of the secured credit card application or inquire directly.

If the card does report to the credit reporting agencies, your actions while using it will help build your credit history. Here's how it works:

  • Apply for a secured credit card and make a cash deposit to open your account. This deposit is usually the same amount as your initial credit limit.
  • Use the card just as you would a normal credit card, at stores or for bills, being sure to pay the full balance each month.
  • Continue using the card and making on-time payments, but don't max out your card.

Keep an eye on your credit and watch your score over time.

How long does it take for a secured credit card to repair or build up your credit?

If the secured credit card reports to the credit agencies, you'll start creating a credit history from the moment you open the account. The new account will show up on your credit report, and after the first billing cycle, any payment will show up there, too.

Remember, you don't get credit for on-time payments if you don't use your card. So, you would need to make a small purchase and pay it off right away. You won't want to use all of your available credit limit since using too much can lower your credit score.

(Credit utilization ratio, or the amount of credit used compared to the amount available, is an important factor in your overall credit score.)

How much a secured credit card will raise your score depends on a few factors, including:

  • If you had a previous credit history
  • How well you use your secured credit card
  • Other debts or loans you have
  • Other financial actions you take (applying for cards, paying bills on time, etc.)

If you do everything correctly, you could see your score go up in a few months and see significant improvements within six months to a year. However, this varies by the person.

How long should I keep my secured credit card? 

Some secured credit cards have annual fees and other costs, so it makes sense to want to close it after you've graduated to a good credit score. After all, part of the reason people get a secured credit card is to be able to eventually get an unsecured card.

However, there's no reason to close the account if you don't have to, especially if it's not costing you anything. Not all cards have annual fees. If you keep the card open, it will continue to add to your credit history — and that can be a good thing.

On the other hand, closing your account may have a negative effect. This is because part of your credit score is made up of:

  • Average age of credit accounts
  • Age of oldest account
  • Utilization ratio

If you close the account, the age of your oldest account immediately drops lower; you'll no longer have your secured credit account to average in. Also, the amount of available credit goes down, too. So, if you no longer have that $1,000 secured credit card limit, your utilization ratio may change drastically, reducing your score.

Unless you can replace that secured credit card with another card and use it in much the same way, it may be better to keep a secured card with no fees for a little while longer.

How much security deposit should I put in, and for how long?

The amount of your deposit directly affects how much of a credit line you'll have. You'll want to think ahead to how you'll use your secured credit card and what type of purchases you'll make with it.

Some retailers may put temporary holds on your card, such as when you fill up with gas at the pump or when making a hotel reservation. These holds reduce the amount of your credit line you actually get to use (at least temporarily), so a larger credit line may make sense if you frequently use your card for these things.

Keep your deposit applied to your account for as long as you think you'll need access to that credit limit.

Are there other ways beyond secured credit cards to build credit fast?

Secured credit cards are just one way to build credit, but they may not be the quickest way to bump your score a few points.

Other options include the Experian Boost service, which scans your credit card and bank accounts to see if any past purchases may be eligible for credit reporting. Purchases like phone bills or rent may qualify; if they do, you could see on-time payments boost your credit score up to 13 FICO points right away. To take advantage, you must sign up for their free service and connect your accounts, and it doesn't work for everyone.

UltraFICO is another solution that scans your accounts to see if you are using money responsibly. You won't be able to see how it affects your score, however, and not all lenders use this service.

Some banks even offer credit builder loans, designed similarly to secured credit cards. Instead of having the loan amount come to you, it gets put into a bank account. After you've finished making all the payments on the loan, you'll get that set aside amount. You can think of it like a very structured savings plan that gets reported to the credit agencies. 

Perhaps the most reliable way to build credit is to keep making on-time payments for any loans and bills you have. Student loans, car loans, and even insurance payments may count in the long-term strategy to improve your score.

Is a secured credit card right for you?

If you want the convenience of a credit card and aren't able to get an unsecured one on your own, a secured credit card can give you the fresh start you need. Just be sure to look carefully at the terms, fees, and if the card company reports to the credit agencies. With time, the right approach can help you get your score where you want it to be.

Looking for more fresh credit tips? Read our blog for the latest on building your financial future.

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