How to Use a Secured Credit Card to Rebuild Credit

Using a secured credit card to build credit scores can seem like you’re climbing the most inhospitable mountain in the world.

It sort of reminds me of those stories I read about Mt. Everest climbers who faced countless known and unknown setbacks as they worked their way to the top.

Admittedly, building credit with a secured card isn’t a life and death situation, but, in a very real sense, it can be the difference between barely-breathing finances and a vibrant financial life.

You see, building credit is a tough journey up a steep learning curve that takes long-term vision and the ability to walk through financial decisions step-by-step in the hopes that, at some point in the future, you’ll get to the financial heights you’ve always dreamed of achieving.

But how do you achieve stronger credit scores with something as simple as a secured credit card?  That’s what we’re going to explain in this article.

The concepts behind secured credit cards and credit scores are relatively simple, as are the suggestions for using a secured credit card to strengthen your credit scores.

Pro tip: Every consumer has multiple credit scores based on various factors. This is why we’ll say “credit scores” throughout this article and not “credit score”.

What’s a Secured Credit Card?

If you’re not sure exactly what a secured credit card is, don’t worry; we’ve got answers for you.

There are two main types of credit cards: secured and unsecured.

“Secured” refers to the fact that the bank takes something of yours to hold on to just in case you don’t pay your credit card bill. It’s kind of like how your landlord wants a security deposit when you move into a rental.

When you sign up for a secured credit card, you’ll be asked to make a cash deposit that usually ranges between $200 and $500. This deposit goes into a savings account given by the bank who is issuing the card. This is their “security deposit”.

If, at some point in the future, you cannot pay your credit card bill, they’ll pull money from your security deposit to cover the payment.

Secured credit cards are usually offered to consumers with credit scores at or below 600. These scores are considered sub-prime, which is pretty much the worst credit rating you can have.

Some people get these bad credit scores because of bankruptcy, overspending or numerous payments that are more than 30 days late.

Others get bad credit scores for rarer reasons. A spouse, for example, could open credit cards in their partner’s name, then max them out, never make a payment and ruin their significant other’s credit scores.

Whichever the reason, banks see your credit scores as an indication that you’re a higher risk for not paying up when your bill comes.

So, instead of giving you an unsecured credit card that doesn’t require a deposit, they offer you a secured credit card. They’re thinking is that your deposit is their Plan B if you don’t pay up.

No matter how responsible or irresponsible you are, they’ve got the cash deposit to protect themselves.

These are the basics for secured credit cards. Now, let’s talk about credit scores.

What Are Credit Scores?

Credit scores are a numerical value generated by gathering up all the data about your borrowing habits. This data includes:

  • Credit or loan accounts you’ve opened
  • Credit limits
  • Credit balances
  • Loan balances
  • # of payments
  • # of 30-, 60-, or 90-day late payments
  • # of accounts that went to collections
  • Bankruptcies

Some credit reports include civil judgements and tax liens, but changes in 2017 removed many of those derogatory marks.

Companies like FICO have created scoring models, which are math-driven tools that crunch all this data together and spit out a number, usually between 350 and 900. The higher the number, the better the credit score. The lower the number, the more of a risk you are to lenders, according to the scoring models.

The companies who create the scoring models – FICO is the most famous – note that the two factors that most influence your credit scores are how much debt you have in relation to your credit limits and how often you’ve paid late.

If you can pay your bills on time every month and your total credit card balances are less than 30% of your total credit limits, then you’re building good credit scores.

If you’re not doing those things, scores drop, which means you’re stuck using secured credit cards. But here’s the good news: Secured credit cards can build your credit.

How Secured Credit Cards Build Good Credit

Remember how we said that your credit history includes the accounts you have and the payments you’ve made?

Well, the reason your credit histories have this information is because all the companies who gave you loans or credit cards report all your payments to credit bureaus.

Those credit bureaus compile the information and use the scoring models from companies like FICO to generate scores.

How does this pertain to you?

Well, when you open a secured credit card, it goes on your credit report. Every payment you make goes on your credit report. Also, your credit card company will periodically tell the credit bureaus your credit card balance.

These two factors are what most heavily influences your credit scores.

Every Payment Is Reported

According to the FICO scoring model, your payment history makes up 35% of your credit score. It is the single most influential factor.

On-time payments slowly boost your credit scores over time. The more on-time payments you make, the higher your scores will go.

Late payments won’t affect you until you’re more than 30-days late, and, even then, it depends on what type of account you have. For example, health insurance payments and hospital bill tend to give you a grace period or more than one month to make a payment.

So, if you pay your secured credit card a few days late, don’t worry about it. Your score won’t be affected. It’s only when payments are 30 days late or more that your scores will drop. That decrease in score will be worse for payments that are more than 60 or 90 days late.

Once your credit card issuer reports your late payment to the credit bureaus, you’ll see your score drop. Over time, the effects of those late payments will diminish.

However, keep in mind that these late payments will stay on your credit report for seven years before being erased.

Your Balances Are Reported

The second most important factor in your credit scores is something called “utilization ratio”, which is a fancy term for the balances on your credit cards compared to your cards’ credit limits. This ratio makes up 30% of your scores.

In the context of this article, your utilization ratio is your secured credit card’s balance compared to its credit limit.

In the opinion of companies who hand out loans and credit cards, somebody who is using more of their credit card limits is a higher risk than someone who is using less of their limits.

This makes sense, right? Say you want to loan a friend some money. You ask them if they’re borrowing money from other people and they say they are and that they’ve spent all the money they’ve borrowed. That’s a red flag. It tells you they’re spending quicker than they’re paying off their debts.

Since the company who gave you your secured credit card is reporting your balance to the credit bureaus, it’s important that you keep your balances under 30%. This is like the dividing line, according to credit bureaus, between more responsible borrowers and less responsible ones.

Building a Strategy to Use Your Secured Credit Card to Strengthen Your Credit

Now that you know how your secured credit card plays a role in your credit scores, it’s time to come up with a plan for using your card to build your credit scores.

1. Pay Your Balance Weekly

The first strategy we recommend is paying off your secured card on a daily or weekly basis. The philosophy behind this is that paying off your balance every week keeps your utilization ratio low, which prevents your score from dropping.

The advantage to this method is not only keeping your balance low, but it guarantees that you won’t have any late payments, which is the second part of this strategy.

2. Pay On Time

Since your payment history is the most important factor in your credit scores, it’s key that you do everything in your power to make sure you pay off your secured credit card each month.

This shouldn’t be a problem if you implement the strategy of paying your balance weekly. However, if you can’t do that, then, at the very least, set up your secured credit card account to automatically pay the minimum balance on the due date.

This ensures that you never forget a payment. Keep in mind, though, when you don’t pay off your balance in full by the due date, any leftover balance you have will get hit with interest.

How Good Are Secured Credit Cards at Raising Your Credit Scores?

This is a tough question because every consumer has a different set of data that plays into their credit scores.

In a general sense, we know that rocking a secured card in the way we’ve described will definitely raise your score and show creditors that you’re more responsible than you were before you got your secured card.

Exactly how much your score goes up is hard to gauge because every consumer’s credit profile is different.

The only resource we have for theorizing about how much your score will go up is some data we came across from Fig Loans, a company who offers small loans to people with low scores like those who apply for secured cards.

Though these are loans, they have limits similar to secured credit cards, which is why we think the score-increase data they have is pertinent to secured card customers.

According to Fig Loans’ data, at the end of one year, customers see an average score increase of 47 points when they pay their loan on time.

Here’s a breakdown on the average score increases in relation to credit scores of borrowers:

  • Scores of 350-499: 94-point increase, on average
  • Scores of 500-549: 47-point increase, on average
  • Scores of 550-599: 23-point increase, on average

This data tells us that, if you pay your card off all the way and on time every month, there’s a good chance you could see your score go up in a similar way to what Fig Loans’ customers experience.

How to Choose the Right Secured Card to Build Your Credit

Secured credit cards are a great way to build your credit if you use them in the right way. But here’s the thing. You have to pick which card you want to use, which, in itself, can be a little overwhelming.

To help you decide which secured credit card is best, we created a list of five secured credit cards you might want to check out. For each card on the list, we talk about the pros and cons.

Not all of these cards require a deposit but keep in mind that you’ll most likely have to have higher credit scores to get these cards.

Our suggestion is to read over the list and, based on your own financial situation, figure out which card is best for you.

Then, apply for that card. Doing a credit card application will drop your credit score one to two points, but the added credit limit will most likely counteract that drop, especially if you don’t have any credit cards or your other cards have limits of less than $1,000.

Finally, some of these cards will give you access to your credit scores but not all of them will. Read through our guide to free credit score websites to figure out which one works best for you.

J.R. Duren

J.R. Duren is a personal finance reporter who examines credit cards, credit scores, and various bank products. J.R. is a three-time winner at the Florida Press Club’s Excellence in Journalism contest. He is a member of the Society of Professional Journalists and his insight has been featured on Investopedia, GOBankingRates, H&R Block and Huffington Post.

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