How to Build Credit With a Secured Credit Card
Building credit can be difficult because you often need to open new credit accounts and make payments on time to add positive information to your credit report. But creditors don’t want to approve your applications if you don’t already have good credit.
Secured credit cards offer a potential solution — a way to get into the credit game even if you don’t have good credit. But you have to watch out for cards that are loaded with fees.
- Secured credit cards are easier to qualify for than unsecured credit cards because you need to give the credit card issuer a refundable security deposit.
- Secured and unsecured cards can have the same effect on your credit score, and you can use either type of credit card to improve your scores.
- Some secured cards have high interest rates and lots of fees, but that’s not always the case.
What is a secured credit card?
A secured credit card is a type of card that requires a security deposit. You send the credit card company the security deposit when you open your account, and the deposit will generally determine your account’s credit limit.
Security deposit amounts may range from $200 to several thousand dollars. You can choose how much you want to send, but you won’t get the money back until you close the account. And the issuer can keep money from the deposit if borrowers fall behind on payments.
Aside from the security deposit requirement, secured and unsecured credit cards work the same way. However, secured credit cards traditionally have:
- High interest rates and fees: Some secured cards have very high interest rates and lots of fees. You might even find unusual fees, such as a monthly fee to keep your account open.
- Few benefits: Secured cards also might not offer rewards or other cardholder perks and benefits — like extended warranties and purchase protections — that are common on unsecured cards.
That’s not to say they’re all bad. Some companies create helpful secured cards for building credit, including options without annual fees. And a few fintech companies offer secured credit cards that are tied to specific bank accounts and give you more control over the security deposit amount.
How does a secured credit card help build credit?
Secured and unsecured credit cards can have the same effect on your credit scores. But if you have poor credit, you might not be able to qualify for many unsecured cards. As a result, people often use secured credit cards to build credit for the first time or to rebuild their credit if they have low credit scores.
The exact impact will depend on how you manage your account and your entire credit profile, but a new credit card can affect your credit scores in several ways:
- A new hard inquiry: Submitting a credit card application will often lead to a hard inquiry, a record of when a creditor checks your credit report for lending reasons. The hard credit check might hurt your credit scores by a few points.
- A new account: Opening a new credit account will lower the average age of the credit accounts in your credit report. Your youngest account will also be brand new. Both of these might hurt your credit scores, although it’s a necessary setback if you want to improve your credit in the long run.
- A revolving account in your credit mix: Having open installment loans and revolving accounts in your credit report could help your scores. Installment loans can include auto, student, mortgage, and personal loans. Credit cards and lines of credit are common revolving accounts.
- More available credit: Your revolving credit utilization ratio compares your revolving accounts’ balances and credit limits. Increasing your available credit with new cards and higher credit limits can make it easier to maintain a lower utilization rate, which can help your credit scores.
- Your payment history: Your payment history can be the most important factor in your credit scores, but it’s not inherently good or bad. Making on-time payments can help your score, but missing a payment by 30 days or more can hurt it.
Once someone uses a secured credit card to improve their credit they might decide to close the card and open an unsecured credit card instead.
How many points will my credit score increase?
There’s no way to predict the exact impact of opening a new credit card because credit scores consider the entirety of your credit report when determining your score.
For example, a new hard inquiry and account might have a larger impact on someone new to credit than someone who has been using credit for years. Even the impact of a late payment can vary significantly depending on your credit history.
However, maintaining a low credit utilization rate and making your payments on time will always be good for your credit. If you can also pay your monthly bill in full, you can use the credit card to improve your credit without accruing interest on your purchases.
How to choose the best secured credit card
If you want to use a secured credit card to improve your credit, try to find a card that offers:
- No annual or monthly fees: Although some secured cards have application fees, annual fees, and monthly fees, that’s not always the case. The best options won’t require you to pay any fees to open the account or keep it open.
- Helpful cardholder benefits: Some of the best secured cards offer similar rewards and cardholder protections as unsecured cards. Just make sure the rewards won’t tempt you to overspend and wind up carrying credit card debt.
- Reports to all three credit bureaus: A credit score depends on one of your credit reports from either Equifax, Experian, or TransUnion. Ideally, the card issuer reports your account and payments to all three bureaus. Otherwise, it can’t help all your credit scores.
- Transitions to an unsecured card: Some card issuers might convert a secured card to an unsecured card (by sending back the security deposit) if the cardholder manages the account well. You might prefer this to having to open new unsecured cards.
You could also look for options that don’t require a hard inquiry and that allow you to adjust your security deposit as you go, but don’t overthink these too much.
A hard inquiry might hurt your credit, but it’s generally only a small and temporary drop. And the adjustable security deposit can be helpful as you don’t have to give up access to your money. However, you’ll often need to open a new bank account and then apply for the company’s secured card.
Consider an unsecured card for credit building
Many people use secured credit cards to build and rebuild their credit, but an unsecured card can work just as well. And although you generally need a good credit score to qualify for unsecured cards, that’s not always the case.
For example, an Ava membership comes with the unsecured credit-building Ava Card. Ava uses a soft credit inquiry when you apply, so it won’t hurt your credit score. The card also doesn’t require a security deposit and it doesn't have any fees or charge any interest.
And although it doesn’t offer rewards, the card’s not intended for large purchases. Instead, we want you to use it to build your credit as quickly as possible. The Ava Card has a high credit limit and recommends a low spending limit — to help you maintain a low credit utilization rate — and we report your payments and account information to all three major credit bureaus.