Using Secured Credit Cards to Build Credit

Written by: Valencia Higuera

When it’s time to apply for a loan, having no credit history can work against you. In fact, some lenders place applicants with bad credit and no credit history in the same category. Without a credit history, lenders cannot gauge your creditworthiness. There is no history of timely payments or record of good debt management. From a lender’s viewpoint, you could easily acquire funds and never make a single payment. Prior credit history is the key to any loan approval, and if you need to establish credit, you can start with a secured credit card.

What are Secured Credit Cards?

Secured credit cards are like any other type of credit card. These cards are issued by major banks and feature either a Visa or MasterCard logo. You can use these credit cards at any retailer around the world, and the majority of creditors will report your account activity to the credit bureaus.

However, secured credit cards are distinct because approvals and credit lines are based on a security deposit. You don’t need good credit to obtain a card, but your creditor will require a security deposit between $200 and $5,000. This collateral secures your credit line. If you provide a $500 deposit, you receive a credit card with a $500 line. Your creditor holds these funds in an FDIC-insured savings account.

Various banks offer secured credit cards and you might start with your personal bank. If this isn’t an option, you can shop and apply for a secured credit card online.

How to Build Credit With Secured Credit Cards

Getting approved for a secured credit card is only the first step, and this step alone doesn’t build your credit. To build and maintain a high credit score, you have to use your credit card. Good credit develops over time and only after a history of consistent payments. Your creditor will update your credit report every 30 days. Information reported to the bureaus includes your account balances, as well as your payment record.

If you pay your credit card statement by your due date, your creditor will report the account “paid as agreed.” This single positive update can add significant points to your credit score over the course of several months and years. Furthermore, if you pay your account balances in full each month and utilize no more than 30% of your credit limit, this also increases your score.

This is not an overnight process and it can take between six and 12 months to build a fair or good credit history. However, the creditor that issued your secured credit card will periodically review your account. If you always pay on time and pay your balance in full, this opens the door to credit limit increases. Continue to prove your creditworthiness and your creditor may close your secured credit card account, refund your deposit and offer you an unsecured credit card.


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Using Secured Credit Cards to Build Credit

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