Bad Credit? Use a Secured Credit Card to Rebuild

May 29, 2020
posted on 06-07-2019

We cringe when credit repair "experts" tell people that they can boost their credit scores by 60 points in 48 hours. The world of credit reporting simply doesn't operate that way – it takes time to improve your credit score. 

Repaying debts, reducing your credit utilization ratio, and disputing inaccuracies on your credit report are all helpful tactics, but they may not be possible for everyone. A secured credit card, however, can start the process of rebuilding your credit while developing responsible habits that help you maintain a solid score. 

How to Obtain and Use a Secured Credit Card

Secured credit cards are similar to regular credit cards, but there are a few key differences:

1. Check Eligibility Requirements

Like unsecured cards, some secured credit cards have eligibility requirements that must be met before you can open an account. They may include:

  • Having an open checking account from the issuing bank

  • Paying application fees

  • Providing proof of income

  • Meeting minimum credit score requirements

  • No existing tax liens

  • No history of missed payments or bankruptcies

  • Being over 18 years old

  • Having a valid US mailing address

2. Fill Out An Application

Most banking products allow you to apply online these days, but there’s a good chance you can also apply by phone or by mail. Contact the issuing financial institution to find out how to get started, then fill out and submit your application. Most secured credit cards require the following information:

  • Personal information - Your first and last name, phone number, date of birth, and Social Security Number (SSN).

  • Financial information - Existing bank accounts, credit cards, loans, etc.

  • Housing information - Your address, type of residence, whether you rent or own, how long you’ve lived there, and your monthly payments.

  • Income information - The name of your employer, job title, length of employment, and annual income.

3. Make a Deposit

The main difference between secured and unsecured credit cards is the initial deposit requirement. When you open the card, you’ll make a deposit (usually between $200 and $10,000) that will be held by the credit issuer to "secure" your credit card. This means that if you default on payments, the deposit will be used as collateral to repay your debt. 

In many instances, your deposit becomes your credit limit. For example, if you make a $500 deposit, you’d have a credit limit of $500. There are also hybrid cards which are often referred to as “partially secured.” In this case, your deposit might be around $200, but you might receive a $500 credit limit (or higher). You'll discover whether you qualify for a partially-secured card after your application is approved. 

Your deposit will be held for the duration of the account and will be refunded when you cancel your card, provided that your balance is paid in full. Some issuers will allow you to earn interest on your deposit, but many do not.

4. Use Your Card

When you receive your secured or partially-secured credit card, you'll use it the same way you'd use a typical, unsecured credit card (ie. buying items on credit). You’ll receive a monthly statement that lists all of your purchases along with the minimum payment amount, due date, and interest rate. 

5. Pay Your Bills on Time 

Always aim to pay each bill in full, otherwise you’ll owe interest on your balance. Making payments on time and maintaining a low balance will help you build credit and save money in the long run.

6. Graduate to a Secured Credit Card

After consistently paying your bills on time and slowly rebuilding your credit score (usually for at least 12 months), you may be given the opportunity to move up from your secured card. The exact requirements may vary, depending on the card, but many credit card companies look for a score of 650 or above. 

At this point, you may have the option to move up to a partially-secured or unsecured card, allowing you to close your secured card and get your deposit back. Speak with your credit card company or look online to find an unsecured credit card that’s right for you.

How a Secured Credit Card Can Boost Your Credit Score

If you get a secured credit card that reports to all three major credit bureaus (ie. Equifax, Experian, and TransUnion), your payment history will show up on your credit reports.

If it isn't clear on the website or the disclosure statements whether the card issuer reports to the major bureaus, be sure to ask your issuer. Always confirm whether your issuer reports your payment history or you simply won’t be able improve your credit score. 

How to Successfully Build Credit: It’s in the Fine Print

Our experts read the fine print for secured credit cards so that you don’t have to. Rather than combing through cardholder agreements, watch out for the following: 

  • Security deposit: Note the minimum (usually at least $200) and the rules for getting your deposit back.

  • Payment holds: Lately, we've seen terms on a few secured cards stating that payments will be held 7-10 days before they're applied to your account balance. You need to know whether this applies so you don't inadvertently go over your credit limit.

  • Annual fee: This is pretty standard for issuers. Expect to pay anywhere from $29 to $49 for the best cards, but we’ve seen some issuers charge around $75.

  • Variable APR: Look for a card with an annual percentage rate (APR) from 14.99% to about 23%. Rates can go as high as 36% – stay away from those. You might find cards that offer lower introductory rates, but the interest rate is not relevant if you are paying off your balance in full each month (the key to building a better credit score!).

  • Grace period: A common tactic is to promise a very low interest rate. Once you're roped in, you find out there's no grace period. This means that when you buy an item, it starts accruing interest immediately.

Other "gotchas" you should watch for: application fees, monthly maintenance fees, credit limit increase fees, foreign exchange fees, and returned payment fees. 

Tips for Using a Secured Credit Card: Do's and Don'ts

To increase your chances of success, keep these in mind:

  • Use the card frequently (even if it's just for small purchases). You can't improve your credit score if you don't use your card.

  • Pay your credit card bill on time and in full.

  • Keep your balance low and never max out the card. 

  • Don't carry a balance on your card, especially if you have a card with a high-interest rate.

Start Building – or Rebuilding – Your Credit Today

Using a secured credit card is an excellent way to jumpstart the credit rebuilding process. Be patient. Every situation is unique, but if you don't have a recent bankruptcy or judgment on your credit report, you might qualify for an unsecured card within 12 to 18 months.

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