Say you need to rent a car or reserve a hotel room … but your credit score is keeping you from getting a credit card. Or maybe you are just starting out on your own and haven’t had time to build up a payment history. One way to build good credit is to use a secured credit card.
A secured credit card is a type of credit card that’s backed by a cash deposit that you put down when you open the account. Secured cards can offer the same features as traditional credit cards, such as purchase protection, and some even offer rewards program benefits like cash rewards. And if you use a secured card responsibly, you can improve your credit score and potentially qualify for a traditional (unsecured) credit card. Here are three steps to get started.
Step 1: Get started with a secured card
Just like when you apply for a traditional credit card, the secured card issuer will run a credit check. If approved, you’ll pay a cash deposit to the card issuer—usually a minimum of $300 to $500—that will often equal your credit limit. The issuer holds your deposit as collateral.
“This is different from a debit card or prepaid card, which both start with a set balance that you withdraw money from,” says Ruth Susswein, deputy director of national priorities for Consumer Action. “With a secured credit card, you won’t have access to your deposit. It’s there to give the bank security that you will pay the bill when it comes due every month.”
Step 2: Use your card and make your payments on time
Your payment history accounts for one-third of your credit score, so you’ll want to diligently pay off your secured credit card balance in full, on time, every month. Not only will this help your credit score, but it saves you interest charges that would apply to any balance you carry over from month to month.
Because your secured credit card is a form of credit, activity on your account is reported to the three major credit bureaus. “That means there will be a record that shows you have access to credit and make your payments responsibly,” Susswein says. “That is what will give others confidence to lend you money in the future.”
Step 3: Use your card responsibly, and you may be able to “graduate” to an unsecured card
After using your secured card responsibly for 12 to 18 months, you may start seeing offers for unsecured credit cards appearing in your mailbox. Your card issuer may even offer to transfer you over automatically. When you make the switch, keep the good habits you established with your secured card. Remember that any balance you carry over from month to month will be charged interest, and if you carry a balance higher than 30 percent of your card limit, it can affect your credit score.
After you close your secured card, you’ll get back your deposit—and be on your way to a more financially confident future.
This content does not constitute legal, tax, accounting, financial or investment advice. You are encouraged to consult with competent legal, tax, accounting, financial or investment professionals based on your specific circumstances. We do not make any warranties as to accuracy or completeness of this information, do not endorse any third-party companies, products, or services described here, and take no liability for your use of this information.