Secured credit cards are an impressive credit-building tool for people with low credit scores or little-to-no credit history. With a secured credit card, you can practice using credit responsibly with a safety net that prevents you from overextending yourself financially or incurring high interest charges.
However, secured credit cards have limitations, so they won't serve you forever. As you make payments on your secured credit card and increase your credit score, you can "graduate" to traditional, unsecured credit cards. These standard credit cards may allow you to borrow more money than your secured card and enjoy perks like reward points.
So, how do you graduate from a secured credit card to an unsecured card? And how long does it take? Read on to learn more.
How secured credit cards work
Secured credit cards serve as a stepping stone to traditional credit cards. They are designed to help people with poor credit or limited credit history build their credit scores. This is critical for qualifying for standard credit cards as well as for larger debts like student loans, auto loans, and home loans.
Secured cards use deposits to limit lender risk and protect the card users. Here's how secured credit cards work:
- First, users can start by applying for a secured credit card with a low credit limit (maybe just $100 or $200). You do not need to have good credit to apply. In fact, in many cases, there is no credit check required for approval.
- Before you can use the card, you need to leave a deposit with the credit card company that's equal to the credit limit. For example, if you have a $100 credit limit, you place a $100 deposit.
- Then, you can use your secured card for purchases up to the limit of the card.
- Each month, it's important to pay off your bill in full.
- Each payment is reported to the credit bureaus (Experian, Equifax, and TransUnion) and documented on your credit history. The more on-time payments you make, the better your credit score gets.
Eventually, you no longer need the secured card because you qualify for a standard card.
What it means to graduate from a secured credit card
Graduating from a secured credit card means that you have proven yourself responsible enough to handle a standard, unsecured credit card.
Standard credit cards do not require a deposit. In fact, when you graduate to a standard credit card, you can get the deposit from your secured credit card back.
Then, you can start using your new standard credit card like normal: you charge purchases to the card and repay the balance, plus any interest. You can repay the balance in installments, but if you're able to pay off the balance in full each month, you can save money on interest expenses while increasing your credit score over time.
Graduating from a secured credit card is important because unsecured cards have higher credit limits, which allow you to borrow more money. Higher credit limits can also improve your credit score. This is because your credit utilization ratio (the amount of your credit limit that you're actually using) is a factor in how your credit score is calculated. If your credit limit increases to $500, but you keep the balance below $100, your credit utilization improves, and your credit score could go up.
How long does it take to graduate from a secured credit card?
In many cases, secured credit card users can graduate to a standard credit card in 6-12 months. However, your individual secured credit graduation timeline depends on several factors, including:
- Payment history. On-time payments improve your credit score and bring you closer to graduating. Late payments or missed payments can knock points off your score and keep you from graduating.
- Credit utilization. Limiting your credit card balance to 30% (or less) of your credit limit can help you graduate faster.
- Time with the card. Most credit cards that allow for graduation have a minimum time requirement. For example, you might need to use the card for at least six months, with on-time payments each month, to qualify.
- Overall credit usage. Your ability to graduate isn't necessarily limited to how you use this one specific card. Credit card issuers can look at your overall credit score, which might include utility bill payments or rent payments as well as any credit or debt payments. So if you're not paying your other bills on time, you might not qualify for graduation.
- Automatic graduation vs. review requests. Some secured cards automatically graduate if certain conditions are met. For example, if a card requires six months of on-time payments for graduation, your card could be automatically upgraded to the standard version, triggering the refund of your deposit as soon as your sixth on-time payment is processed. Other cards require you to request a manual review after a minimum time frame. If the manual review finds that you qualify for graduation, you can upgrade your secured credit card and get your deposit back.
The best secured credit cards that allow graduation
It is important to understand that not all secured credit cards are on a graduation path. For example, popular cards like Amex Optima don't offer unsecured versions of these products to graduate to. This doesn't mean that these cards aren't valuable. In fact, they may offer benefits that graduating cards don't. But for this article, we're going to focus on the best secured credit cards that allow for graduation.
1. Discover it® Secured Credit Card
The Discover it Secured Credit Card offers:
- No annual fee
- No credit score requirement
- $200 minimum deposit
- 2% cash back at gas stations and restaurants
- 1% cash back on other purchases
- Free credit score viewing
- Automatic monthly reviews for graduation starting at seven months
2. Capital One Platinum Secured Credit Card
The Capital One Platinum Secured Credit Card offers:
- No annual fee
- No credit score requirement
- $49 minimum deposit
- No foreign transaction fees
- Automatic monthly reviews for graduation starting at six months
3. Bank of America Customized Rewards Secured Credit Card
The Bank of America Customized Rewards Secured Credit Card offers:
- No annual fee
- No credit score requirement
- $200 minimum deposit
- 3% cash back in the category of your choice
- 2% cash back on groceries
- 1% cash back on other purchases
- Automatic periodic reviews for graduation
What to do if your secured card won't graduate
If your secured card doesn't graduate (either because there is no standard version of that card to graduate to or because you became disqualified for graduation due to a late payment), you have a few options:
- Apply for an unsecured credit card elsewhere. Once your credit score improves to the mid-600s, you might qualify for an entry-level unsecured credit card from another issuer. Cards branded as "for fair credit" or "credit builder" are more likely to work with credit scores in this range.
- Open a second secured card that doesgraduate. If you're not yet ready for unsecured cards, consider opening a secured card known to offer a secured credit card upgrade.
- Keep the original card open (for now). Even if it won't graduate, it may be smart to keep that card open. This can improve your credit score by increasing the length of your account history and maintaining your credit utilization ratio. Just be mindful of any annual fees; if the fee outweighs the benefit, consider closing it after getting a new card.
- Continue to focus on building your credit. Pay all your bills on time every month. Over time, with responsible credit usage, your score will improve. You can monitor your progress with free credit reports.
- Ask the issuer if they offer any other options. Simply reach out to the credit card company to see if another product might better serve you.
Is automatic graduation from a secured credit card always best?
Automatic graduation is not always the best option for everyone.
In some cases, a card that doesn't automatically graduate could serve you better than one that does. Some secured cards allow you to access your security deposit funds when needed, which might work better for you than a card that locks up your deposit for the entire duration, even if that card offers automatic graduation.
Plus, the terms offered by an automatically graduated credit card might not be as good as the terms offered by other cards. Even if your secured card automatically graduates, you may want to shop around for the credit card that offers the lowest APR once you qualify for a standard credit card.
Start building your credit with a secured credit card today
If you don't already have a secured credit card, consider getting one today to start building your credit score. In as little as 6-12 months, you might qualify for a standard credit card with more features and higher credit limits.
Continue following credit score improvement tips like paying your bills on time and keeping your credit balances low to build your credit score over time. With diligence and patience, you can build up to an excellent credit score that helps you get approved for loans to purchase a car, buy a home, or even start your own business — all with favorable interest rates.
