Use a Secured Credit Card to Build Credit

A secured credit card is a credit card with a limit that is based on the amount of money you put down as a security deposit for the card. People with poor credit or no credit history often can't obtain unsecured credit cards because banks view them as too risky. If you have poor credit or no credit history, obtaining and responsibly using a secured credit card can help you build or rebuild credit.

Steps

Getting a Secured Credit Card

1. Search for lenders that offer secured credit cards. Many lending institutions offer secured cards, which can come with a variety of different fees and a wide range of interest rates. Shop around for the best deal online.
   • Your bank may offer secured credit cards. If so, this may be the most convenient option. Check your bank's website or talk to a banker.
   • There are several websites that summarize and rank the features of different credit cards, including secured cards. This can help you to make easy comparisons between your options.
2. Choose the right card for you. Compare the information you have collected and chose the card that best meets your needs. Keep the following in mind:
   • Make sure the creditor you have chosen reports to all three major credit bureaus. Otherwise, your payments may not do much to improve your credit.
   • Choose a card with minimal fees and the lowest interest rate possible. Many secured cards charge an annual fee, but some do not. Try to find one with relatively low interest and no annual fee if possible.
   • Choose a card with a minimum deposit that you can afford. Cards can vary a great deal in how much money you have to put down in advance.
   • Always read the fine print before applying for a secured credit card so that you fully understand the terms and conditions before committing.
   • Be sure to ask the credit card company about graduating from a secured to an unsecured account. Many lenders will lift your security deposit requirement and return your security deposit once you've made a certain number of timely payments.
3. Apply for a secured credit card. Once you choose a bank, complete the credit request form, and sign the necessary documents as per the bank's instructions.
   • The forms are often available online via the bank's website.
4. Submit your deposit. Once you've completed the necessary application forms, you'll need to submit your initial deposit. The amount you deposit will determine how much you can spend on the card.
   • For example, if you deposit $1000, with most cards, that will also be your credit limit.
   • This deposit does not count toward your payments, it is just collateral for the bank if you don't pay. If you make your payments on time, you will get this deposit back when you close the card.
   • Some banks may pay a modest interest rate on your deposit.
   • Typically your deposit will be between $200 and $10,000
   • Make sure to find out how long it will take to have your deposit returned after closing the card. Some banks will hold your deposit for a couple of billing cycles in case of any delayed charges.

Using Your Card Responsibly

1. Make small purchases. Once you have your card, you'll need to use it, but in moderation. Buy a few small things with it every month.
   • You must use your credit card to build credit. Just getting a card and never using it doesn't show creditors you are capable of using a credit card responsibly.
   • Buy a few cups of coffee or use the card to fill up your car with gas once a month. Keep the purchases small so you can be sure to pay them off.
2. Pay your credit card balance off every month. Not only can you avoid paying interest this way, but you can also rebuild bad credit or build a credit history more quickly.
   • Pay your bill on time every month. Even if you can't pay the full amount off, make at least the minimum payment on time every month to boost your credit rating.
   • Failure to pay on time can result in default, which may lead the bank to keep your deposit.
3. Increase your credit limit. Increase your credit limit when you can by depositing more into your security deposit account. Try to obtain a limit that is representative of your ability to be responsible with a lot of credit.
   • Keep your balance low. No matter what your credit limit is, be sure to maintain as low a balance as possible. It is generally a good idea to keep your balance below 30% of your credit limit.
   • Do not spend more with the card than you can realistically afford to pay, or the card that you got to rebuild bad credit could make your credit even worse.
4. Switch to an unsecured card when you can. Only keep your secured credit cards as long as you have to. Secured cards typically come with relatively high interest rates and are therefore not a good option once you can get an unsecured card.
   • Be sure to pay your secured card down to zero and close the account. Otherwise, you may damage your credit or incur fees by accidentally using the card and/or neglecting to pay for charges on the account.

Tips

• Remember that you are using a secured card to build credit, not to get yourself further into debt. Calculate your projected monthly payments into your budget so as to be sure you can afford to open a credit card account.

Warnings

• The high interest rate of most secured cards can cause you balance to increase quickly if you don't pay it off each month.
• Be aware that some secured credit cards require upfront set-up fees, which will be added to your card's balance before you even receive the card. If you have a low card limit, these fees can sometimes add up to your total limit, leaving you with no credit to draw from and a monthly payment.

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Sources and Citations

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