How much does a secured credit card build credit

Dear PAS,

Opening a secured credit card account can be a very good way to start building or improving your credit history, especially since secured cards tend to be easier to qualify for than a traditional credit card account.

How Does a Secured Account Work?

A secured credit card works the same as an unsecured card, with one exception: To open a secured credit card account, you must provide at least a minimum required deposit to the card issuer. They will then issue you a card with a limit often equal to your deposit.

That money is what "secures" the account. If you stop paying your bill, the lender can use the deposit to cover the amount owed. Because providing a deposit decreases the lender's risk, secured cards can be easier to qualify for than typical, unsecured cards.

If you manage the secured account well, making charges and paying the bill on time each month, the lender may eventually convert the account to an unsecured credit card account.

Before opening a secured credit card account, ask the card issuer if it reports the account to the credit reporting companies (Experian, TransUnion and Equifax). Some may not. If they do not, it will not help you build a credit history.

However, the lender may start reporting the account if it is converted to a standard, unsecured, credit card account. This way, even if it is not reported initially, a secured card can be a way to get your foot in the door to start building credit.

One important caution, though, is to be certain you are applying with a reputable company. Beware of online offers that sound too good to be true. If you have an account with a bank or credit union that offers a secured card, applying with them might be a good place to start.

Other Ways to Start Building Credit

Opening a secured credit card can be a great first step to establishing credit, but there are other options as well:

• Ask a family member to cosign a small loan. If you have a trusted relationship with a family member who has good credit, asking them to cosign even a small loan can help you begin building your credit. Keep in mind that any late payments you make will appear on their credit report for seven years as well as yours, so it's critical that you make every payment on time.
• Ask a friend or family member to add you as an authorized user. Not all lenders report authorized-user accounts to the credit reporting companies, but many do. Although you are not responsible for making payments on the account, being an authorized user on someone else's account can help you build your credit report.
• Add your on-time utility and streaming service payments. If you have utility, cellphone or streaming service accounts in your name, you can sign up for Experian Boost®ø to add that payment history to your Experian credit report, which can increase your credit score. This can be especially beneficial if you have a thin credit file with fewer than five credit accounts.
• Sign up for Experian Go™. If you don't yet have a credit report in your name, Experian Go™ lets you create an Experian report and then helps you find the best path for establishing credit and helping you begin your credit journey.

Improving Your Credit History

If you're trying to improve your credit scores because you've had credit difficulties in the past, the best way to get started is to make all your payments on time going forward, bring any past-due accounts current as soon as possible and start paying down outstanding credit card balances.

If you haven't already done so, requesting your free credit report and free credit score from Experian can also help. Your credit score will come with a list of the risk factors currently impacting you the most, so you'll know what specific changes you can make to start increasing your scores.

Thanks for asking.

Jennifer White, Consumer Education Specialist

Editorial Note: We earn a commission from partner links on Forbes Advisor. Commissions do not affect our editors' opinions or evaluations.

A secured credit card requires you to make a cash deposit to the credit card issuer to open your account. With a secured credit card, the amount you deposit, or use to “secure” the account will be equivalent to the line of credit you receive. In other words, a $500 deposit will get you a card with a $500 line of credit.

Read on to learn more about secured credit cards and see if one is right for you.

Find The Best Credit Cards For 2022

No single credit card is the best option for every family, every purchase or every budget. We've picked the best credit cards in a way designed to be the most helpful to the widest variety of readers.

How Do Secured Credit Cards Work?

Secured credit cards can be used like any other credit card to make payments, and will run on one of the big payment networks like Visa, Mastercard, American Express or Discover. But secured cards are designed for those with limited-to-no credit or those with damaged credit.

Just like with other types of loans, such as mortgages, auto loans or student loans, credit card issuers use past credit history to determine eligibility and interest rates for their products. The better your credit score, the better your offers will be. That’s because a good credit score signals to lenders that you’re less likely to default or pay late.

But if you have no credit or not-so-great credit, a lender may determine that it’s too big of a risk to approve you for a credit card. Enter secured cards. Lenders who are reluctant to issue credit to borrowers who have struggled financially or are lacking a credit history may be more willing to approve applicants for a secured credit card, as it requires a deposit that can be seized if the debt is unpaid. That deposit is like insurance for the lender if the cardholder fails to make on-time payments.

Each card comes with its own minimum and maximum credit limits, typically starting at a minimum required opening deposit of a few hundred dollars up to several thousand dollars, depending on the card limit and how big of a deposit you’re willing to give.

The Difference Between Secured and Unsecured Credit Cards

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

Secured Card

Most secured cards are used as a financial tool to help you boost or establish your credit. The credit limit with a secured card is typically based on how much you put down as a security deposit.

If your on-time payment record with a secured credit card is consistent, the lender may eventually increase your credit limit or offer you an unsecured credit card with more appealing terms and better rewards. If you need to build credit but can’t get approved for an unsecured credit card, a secured card can be a good alternative.

Unsecured Card

Unlike secured cards, an unsecured card doesn’t require a security deposit and poses a greater risk to the credit card company. These cards are more likely to be approved for those with good-to-excellent credit. Some of the unsecured cards offered to people with poor-to-fair credit can have unfavorable terms, including annual fees, high interest rates and lack of a rewards program. There are some good unsecured cards on the market designed for those new to credit, like students or those who move to the U.S. for work. But for those who have had credit missteps, the available options may be costly.

Most unsecured credit card products offered to those with good-to-excellent credit feature lucrative rewards programs, including cash back, miles or points on everyday purchases. There may be some unsecured credit cards that are easily attainable for those with subpar credit, but these usually charge extremely high annual fees and may not offer you a good APR, or interest rate, on your spending.

How To Get A Secured Credit Card

Like any other credit card, the first step is to fill out and submit an application. The lender will then conduct a credit check. The main difference between a secured and unsecured credit card application is that the former will require your bank account and routing number in order to process a refundable security deposit. The amount you deposit becomes your credit limit—the maximum amount you may charge on the card.

Upon acceptance of your security deposit, a secured credit card works just like any other card. Since secured cards are often aimed at people with less-than-stellar credit and are likely to come with high APRs, make sure to pay off your balance in full every month to avoid exorbitant interest charges.

Similar to unsecured cards, your charges will appear on your statement with an amount due for that month. You will need to pay off what you charge to the card each month—your deposit does not cover that. If you decide to cancel the card after a period of time, you may receive your deposit back, assuming your balance is paid off.

How To Use Your Secured Card To Improve Your Credit

Making on-time payments is one of the biggest factors that goes into making up your credit score, accounting for 35% of the total. Making your monthly payments on time is key to building up a good credit profile. The best secured cards will report your payments to all three of the major credit reporting agencies (Equifax, Transunion and Experian) so you can eventually graduate to an unsecured card after demonstrating responsible behavior.

The other thing to keep in mind, which can be especially tricky if you have a relatively low credit limit on your secured card, is your credit utilization. Also known as your debt-to-credit ratio, this is the ratio of your total outstanding balance on your card to your overall credit card limit. Your credit utilization makes up 30% of your credit score so it’s a good idea to keep this top of mind when using your card. Ideally, you’d aim to keep this ratio at 30% or less.

Here’s where it can be challenging though. It may not be as hard to stay below 30% on a card with a $10,000 credit limit, as that would mean carrying a balance of $3,000 or less. But on a card with a $500 credit limit, that’s only $150 in charges. If possible, pay off any charges as soon as you can, even if it’s before the end of the billing cycle, to help keep credit utilization low.

Improving your credit score doesn’t happen overnight. A secured credit card can be a stepping stone towards reaching that goal. The lifetime value of a good credit score will save you money on most of your major life purchases, so it’s a financial target worth pursuing.

Find The Best Credit Cards For 2022

No single credit card is the best option for every family, every purchase or every budget. We've picked the best credit cards in a way designed to be the most helpful to the widest variety of readers.

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