How to Build Credit with a Secured Credit Card
Take a trip to any grocery store, shopping mall, or gas station and chances are you'll see consumers paying for their purchases with credit cards. You might even hear friends or family members bragging about accumulated airline miles or cash back rewards that they plan to redeem for airline tickets or retailer gift cards. You'd love to make purchasing everyday necessities fast and convenient, and maybe earn rewards, too. There's just one problem: when you last tried applying for a credit card, you were denied because you have an insufficient credit history. But how are you supposed to build credit if no one will give you a credit card?
A strong credit history may help you earn the most favorable borrowing terms, including credit cards with lower interest rates, and rich rewards and benefits programs. A track record of paying your credit card statement balance on time – and preferably in full – can help you build a high credit score you'll need to earn these benefits.
Build your credit history over time to help you enjoy benefits of a higher score.
What is a secured credit card?
Did you know that not all credit card offers are created equal? Credit card offers that tempt applicants with generous rewards programs are typically tailored to borrowers with long and strong credit histories. Elite travel rewards credit cards often fall in this category. Apply for one of these credit cards with no credit history and you may find yourself denied – no matter how trustworthy you are, or how much ability you have to repay your credit card statement balance.
Consider applying for a secured credit card instead. With a secured credit card, you'll provide your credit card issuer with a security deposit after you're approved. The credit limit on your new secured credit card will equal the amount of your security deposit. The security deposit protects the credit card issuer in case you don't pay your statement balance, and that's what makes them easier to qualify for – even if you have no credit history.
Unlike secured cards, unsecured credit cards don't require a security deposit. But because both secured and unsecured credit card issuers report your purchase and repayment activity to credit bureaus, they can both help you build your credit history.
What is the difference between a secured and an unsecured credit card?
The core difference between secured credit cards and unsecured credit cards is that secured credit cards require a security deposit while unsecured credit cards don't. Other details such as rewards, interest rates, and your credit line will vary depending on your card issuer and the card you apply for.
Aside from the security deposit, a secured credit card works the same as an unsecured credit card. You can spend with your secured credit card anywhere it's accepted for payment – including hotels, restaurants, grocery stores, and other retailers – up to your credit limit. During months where you carry a balance, you'll need to repay at least the minimum payment on or before the due date, and preferably more.
How to build credit using a secured credit card in 4 steps
When selecting a secured credit card, you should first choose the card that works for you. Your secured credit card should report credit activity to all three major credit bureaus in order to help you build credit. Other things to look for in a secured credit card are no annual fee, purchase protection and credit score tracking.
After selecting your card, the issuer will likely check your credit and income and then require a cash deposit. This deposit is placed into a secure account and will be returned to you after closing your card while in good standing or when changing to an unsecured credit card offering if possible through your credit card issuer.
Once you've paid your security deposit and received your secured credit card, make a habit of using it regularly – don't save it for emergencies. That's because regular, controlled credit card spending and repayment habits help build credit. Consider using your new credit card at places like the gas station so you can more easily anticipate what your month‐end balance might be. Save your receipts and check your balance regularly, keeping your balance low. But no matter how high your balance grows, make sure you have a plan to pay it off.
If you pay your statement balance in full and on time, using your credit card for purchases won't increase the cost of the goods or services you buy. If you don't pay your statement balance in full and on time, you may pay interest charges or late fees. These can add up quickly. Late payments and too‐high balances can also damage your credit score, so paying attention to what you spend and when you repay is important.
The most important habit to practice with your new secured credit card is to pay your statement balance on time, every time. Late payments account for over one‐third of your credit score. Your credit score is a three‐digit number that helps lenders assess your trustworthiness as a borrower. Although other factors such as balances owed and age of credit accounts are also important, establishing a history of on‐time payments is essential to building strong credit history, and that can help save you money in time.
Note your statement due date when you first get your credit card and mark it on your calendar. Your credit card issuer may also send you electronic reminders, paper statements, or both. Mobile payment apps can also help keep you on track. Try to pay your statement balance in full if you can, remembering that balances owed count toward your credit history, too – but at the very least, make sure to make the minimum payment, on time.
As you get used to your credit card it's a good idea to monitor your credit score and history. Your credit card issuer may give you free access to your score. With on‐time payments and controlled spending, you may watch it grow as time passes. High scores are better because they can help you qualify for unsecured credit cards that offer rewards, in addition to low interest rates on other types of loans.
If you've been monitoring your score and you notice it dropped suddenly, review your credit reports. You can get all three for free once per year at AnnualCreditReport.com. And when you practice disciplined spending and repayment habits with your credit card, you may reap the rewards of a strong credit history.