How to Build Credit With a Secured Credit Card

Secured credit cards help build your credit history and improve your credit score in multiple ways. 

Below are 5 steps that you can take in properly managing your secured credit card to ensure you are achieving the maximum credit boosting benefits available. 

Step 1: Choose 3 Secured Credit Cards and 1 Credit Builder Loan

To achieve a good credit mix, you should aim for 3 revolving accounts and 1 installment loan. 

The good news is that you can accomplish this using credit-building products. Opening 3 secured credit cards counts towards the 3 revolving credit lines, and a credit builder personal loan qualifies as an installment loan. Also check out our article, What Is a Secured Credit Card? if you want to know more about secured cards.

Opening all of these accounts at the same time has several benefits. 

The first is that if you apply for them all at the same time, you are more likely to be approved than if you had waited. Once the hard inquiry and account info hits your credit report, it could decrease your score temporarily, which makes subsequent approvals more difficult. 

The second reason to open all 4 accounts at the same time is to let them build history together. Each month they are open and in good standing, the payment history and account age portions of your score will increase. 

Just keep in mind you’ll need to have enough cash on hand to cover all three security deposits. Also take a look at how this can impact your score: How Much Will a Secured Credit Card Raise My Score? , Secured vs. Unsecured Credit Cards, or How Long Does It Take to Build Credit With a Secured Credit Card?.

Step 2: Limit the Credit Utilization Rate to 10% or Less

One of the biggest factors in calculating your credit score, beyond payment history, is the amounts owed. This portion of your score is determined by your loan balance and credit utilization on your revolving accounts. 

Credit utilization is calculated by adding up the balances on all of your credit cards and dividing it by the total credit lines on all of those cards. The resulting number is your credit utilization ratio and you can multiply that by 100 to get your credit utilization rate. 

For example, let’s say you have the following balances on your secured credit cards.

• Card 1 – $100 balance with a $500 limit
• Card 2 – $50 balance with a $300 limit
• Card 3 – $25 balance with a $250 limit

Your credit utilization ratio is calculated as (100 + 50 + 25) divided by (500 + 300 + 250) which equals roughly 0.17. Multiply this by 100 to get a credit utilization rate of 17%. 

Ideally, you should keep this rate to 10% or less to maximize the amounts owed portion of your score. 

To get the credit utilization rate lower, you can work on carrying less of a statement balance and take advantage of any credit line increases, especially if they are unsecured. In our above example, you’d only need to increase your credit limits by $600 to achieve a 10% utilization rate.  

Step 3: Pay More Than the Minimum Due Each Month

The biggest factor in your credit score, making up 35%, is your payment history. So it is imperative to build up this portion of your score and keep it there. 

Paying on time is the biggest factor. Even one 30-day late payment can tank your score. But that doesn’t mean you should wait until the due date to pay your statement. 

Even more importantly, when you pay is a secret scoring factor. It’s a little-known fact that you get a credit score boost from paying more than the minimum payment. 

If you’re only making the minimum payment on your credit card, it could indicate financial trouble. That’s why scoring models reflect this as a risk factor.

Step 4: Use the Card Regularly

If you have a bad credit history, you may be tempted to open a secured credit card and then throw it in a sock drawer never to be used. If you don’t ever use it, then you’ll never have to pay interest or risk overcharges or late payments, right?

Don’t do this. 

While it can seem smart to limit your temptation, not using the card at all actually works against your credit score. There are two reasons for this. 

The first is that a credit utilization rate of 0% actually decreases the potential points you earn for the Amounts Owed portion of your score. With zero debt, it is impossible to know if you can manage credit well or not. So the credit reporting agencies ding you for this behavior. 

The second reason keeping a zero balance is bad, is that many card issuers will stop reporting to the credit bureaus if there is no activity on this card. This often won’t happen until you have at least a few months of no activity, but when it does happen, it will hurt your credit score.

So unless you are working on paying down an existing balance on a secured credit card, it is best that you regularly use it. 

Step 5: Monitor Your Credit Score

How do you know if your secured credit card account is improving your credit score or not? 

You don’t if you are not monitoring your credit score. 

Luckily, many of the secured credit cards out there on the market actually offer credit monitoring services with their cards. They’ll let you know when any changes to your credit file have occurred and give you an estimate of what your credit score looks like. 

You can also use third-party services like Credit Karma or Credit Sesame to keep apprised of your credit file and what your score might be doing. 

Or you can go directly to the source, MyFICO, to get your official FICO credit scores for all three bureaus. 

Monitoring your credit score like this can help you see how the actions you take impact your credit score, and they can be an early warning system for potential problems. 

And, in cases where your existing credit score was damaged due to identity theft, you’ll want to keep a close eye on your credit reports to make sure everything reported is accurate.

How to Choose the Best Secured Credit Card

Not all secured credit cards are created equal. And not all secured credit cards will help you improve your credit score in the same way. Here is a comprehensive list for you to check out if you’d like: The Best Secured Credit Cards to Build Credit.

When looking for a new secured credit card to add to your wallet, there are a few things that you should keep an eye out for to ensure that the card you choose is the best product for achieving your individual credit score goals.

Check if the Cards Report to All 3 Credit Bureaus

You might have to read the fine print to find the information on this one. 

Although, cards that do offer to report to all three credit bureaus often feature it up front in big bold words. 

It is still important to check because not all secured card issuers will report to all three credit bureaus. Often, an inferior product may only report to one credit bureau instead of all three. 

But why is it important for a secured card to report to all three major credit bureaus?

It’s important because you never know which credit bureau a future creditor/bank/employer is going to pull your credit information from. 

If your new secured credit card issuer only reports to Equifax, then your attempts at using the card for building credit will only improve your credit score through Equifax. Your TransUnion and Experian credit reports and scores will remain poor. 

Flash forward a few years, and you are trying to rent an apartment. The apartment runs a credit check and you are denied the apartment because they pulled your TransUnion report and score which received zero improvement from that secured card that only reports to Equifax. 

Settling for a secured credit card that does not report to all three bureaus is essentially letting all of your hard work in rebuilding your credit go to waste.

Compare the Fees

This is another bit that you are likely going to have to inspect the fine print for to get the full picture. 

Many cards will put their interest rates front and center, and you’ll definitely want to pay attention to that. While you shouldn’t open a secured card with the intention of holding a balance, if you ever need to, it’s helpful to know you have a reasonable interest rate. 

You’ll probably have to dig a little deeper to find any information on annual fees or monthly maintenance fees. While cards that don’t have these fees advertise it, cards that do have these annual fees or monthly fees tend to hide it. 

And you should be aware that an annual fee could come out of your cash deposit, which will lower your initial credit limit. 

If the secured card has other features or perks that are beneficial to you, then paying a small annual fee might not be too bad. Just know that there are cards out there without the fee. 

And steer clear of secured cards that charge a monthly fee. 

Some other fees to watch out for include: 

• Foreign transaction fees
• Late fees
• Cash advance fees
• Penalty APR
• Balance transfer fee
• Returned payment fee

Look for Rewards & Perks

Often, the rewards or perks offered on secured credit cards are few and far between, but cashback and perks are not unheard of on a secured credit card. 

One perk that you’ll definitely want to keep an eye out for is any type of credit monitoring. When you are trying to build credit or improve your bad credit, credit monitoring will be your best friend. It lets you know when you are on track and when you are falling behind on your goals. 

There are a handful of secured credit cards out there that give you the opportunity to earn cashback or rewards points. The earning rate is going to be low, but earning some rewards is better than earning no rewards. 

Availability of rewards earning potential on a secured credit card sometimes comes with an annual fee, so be on the lookout for that. 

Another great perk to be on the lookout for that does not often appear for secured credit cards is a balance transfer offer. If you are trying to repair bad credit, debt consolidation can help you. 

By transferring the debt instead of directly paying it off, you’ll have the benefit of building a good payment history while paying little to no interest. Just be aware of any potential balance transfer fees to ensure the transfer of debt is worth it. 

Find Out if There is an Upgrade Option

The ultimate goal of getting a secured credit card is to eventually graduate to an unsecured card. 

Why?

Because unsecured credit cards offer better rewards, lower interest rates, higher credit limits, and fewer fees. 

Some secured credit cards will extend your credit limit beyond your security deposit after a few months. 

For instance, if you put up a $300 refundable security deposit, your initial credit line will be $300. But after a few months, the card issuer may offer to double your credit limit to $600 without the need for an additional security deposit. 

And this new, higher credit limit, can give you a boost to the credit utilization part of your score. 

Some secured credit cards have an automatic path to upgrade. These cards have a sister product with similar features that is an unsecured card. For example, Discover offers their It card as a secured credit card or an unsecured credit card. 

Cards like this will have a set period of time when they will review your account and see if you are eligible for an upgrade. If you are eligible, they will often transfer you to the unsecured card automatically and refund you your security deposit. 

How Much Will a Secured Credit Card Raise My Score? 

Credit reports are unique to each individual. They contain a history of everything you’ve ever done (at least in the last 7 years) which involves your credit. 

From the store credit card you opened to get a discount on your purchase and then closed two months later, to that one time you were a month late on your rent payment because you unexpectedly had to go out of town. 

All the good and bad choices you’ve made are recorded on your 3 credit reports. And your credit score for each major credit bureau will be a reflection of that report. 

So, when building credit, how much and how quickly your credit score improves will depend on the unique makeup of your credit profile.

Generally speaking, most people can expect their credit scores to improve up to 200 points within a 12 month period of time if they are managing their secured credit card(s) properly.  

If you have a bad credit score in the low 500s or below, you can use our three secured credit cards plus one credit builder loan plan of action to achieve a score in the 700s within 12 months’ time. 

Again, this only works if you follow our other suggested steps to build credit. 

For those who have no credit, you may see your credit score rise even quicker. By establishing good practices from the get go, you will be well on your way to a good credit score in no time. 

But, if it is taking you a bit longer than you’d like to see your credit score improve, try not to get too disappointed, sometimes building credit just takes time. 

Conclusion

If you are reading this article, then you are already looking for the best way to improve your credit score, so congratulations on that! You have already taken the first step towards building good credit! 

Using a secured credit card on your credit-building journey is a great way to get started. By following the steps offered above, with hard work and a little patience, you can achieve a score in the 700s in as little as a year, even if you are starting with a bad credit history. 

And don’t forget you can also use our guidance in helping you select the best secured credit card to fit your needs. 

You’ve already taken the first step, now it’s time to really get moving down the path towards better credit.