How I Used Secured Credit Cards to Rebuild Credit | Bankrate

If you have badly credit, a limited citation history or a recent derogative mark on your credit report, you might have perturb applying for many of today ’ s top credit cards. But there is another way for you to prove that you can handle credit responsibly—a secured credit card. Secured credit cards give you access to a small line of credit in substitution for a security deposit ( normally the lapp measure as your credit limit ). Since you ’ re securing the line of citation with your own money, lenders are frequently comfortable issuing secured cards to people who have little to no credit or who are recovering from fiscal setbacks like bankruptcy. We spoke to three cardholders who discovered just how big a deviation a secured card with a small credit limit can make.

here ’ s what they learned as they used secured cards to build their recognition history and improve their credit score—and what you can do if you ’ re ready to do the same .

How to use a secured credit card

Before we jump into how precisely secured credit cards can be a useful cock when working to rebuild citation, let ’ s understand how to use a secured accredit card .

  1. Choose the right card. A secured credit card isn’t designed to be used for everyday expenses, so the factors to consider when choosing the right card will differ from a standard unsecured rewards credit card, for example. Ideally, you are going to want to find a secured credit card that does the following: reports your account activity to the credit bureaus, requires a reasonable security deposit, offers a path to upgrade and doesn’t have outrageous fees.
  2. Pay the security deposit. After you apply for a secured credit card and get approved, make sure to provide the security deposit. You are not authorized to use the credit card until you pay the deposit within a certain time frame.
  3. Use the card. Once you pay your security deposit, you can start using your secured credit card, but use it wisely. Avoid maxing out your credit card and keep your balance low to maintain a good credit utilization ratio.
  4. Pay your balance on time and in full. The point of a secured credit card is to build strong credit, so the best way to go about this is by practicing solid habits. You can start by always paying your balance on time and in full every month.
  5. Graduate to an unsecured credit card. It varies by issuer, however, some secured credit cards automatically graduate to traditional unsecured credit cards after you establish a history of on-time monthly payment.

A secured card is an opportunity to show responsible credit habits

Jessica Clark, who runs a cook blog, Gluten Free Supper, and her conserve turned to secured recognition cards as a way to dig themselves out of a bad credit hole. “ My conserve and I had to file chapter 7 bankruptcy about seven years ago, ” Clark said. “ We truly wanted to purchase a dwelling, but knew that would be following to impossible with having good filed bankruptcy and having bad credit. ” “ I applied for a secured credit poster and added my conserve as an empower drug user, ” Clark said. “ We used our cards regularly, making certain to keep our usage under 30 percent. ” This strategy helped them earn the fiscal freedom to escape a rental market that required them to move closely every year. While Clark was working to improve her bad citation, Sam McRae, an injury lawyer in Georgia, was in the status of not having any accredit history at all. “ I was taught to pay everything with cash by actually economical parents, ” McRae explained. His cash-only spend had left him with no visible citation file. “ After law school, I realized that I didn ’ t have enough credit to get a loanword or a credit poster. ” He, excessively, turned to a secured credit card. Both Clark and McRae were able to use secured credit cards to prove they could use citation responsibly —and both were able to cursorily build their credit rating scores as a result. once lenders are able to see you can handle a secured credit tease without overspending or missing payments, they will be more likely to increase your credit cable, refund your security deposit or give you the opportunity to apply for an unguaranteed credit menu .

Even a small security deposit can make a big difference

When you take out a secured credit batting order, lenders require you to pay a security system deposition. This helps protect the lender if you aren ’ t able to pay your credit card balance. Most guarantee cards match your accredit terminus ad quem to your security deposit. Brian T. Edmondson, collapse of Bankruptcy Recovery Foundation, started to rebuild his credit after bankruptcy with a $ 200 security deposit on a card. But many secured cards allow you to put down even less collateral. For case, the Capital One Platinum Secured Credit Card allows you to start with a sediment adenine low as $ 49. In some cases, you won ’ t even need to come up with the money in progress. “ The guarantee cards that I used did not require a security lodge upfront, ” Clark explained. rather, the first argument for each menu would include a fee in the amount of the security deposit. “ I didn ’ t need to come up with the money until about a month late when the payment was due. It was accomplishable because it was only $ 200. ” If you ’ ra looking for a higher limit, some secured cards give you the opportunity to put down a larger deposit in exchange for a larger credit agate line. The Discover it® Secured Credit Card allows cardholders to make a security deposit between $ 200 and $ 2,500, with a citation restrict to match.

Be consistent with small charges and full payments

A secured citation card gives you a probability to both practice and prove responsible recognition habits. The key to building recognition with a secured credit poster is to use a humble percentage of your credit line each month and then pay it off when your statement arrives. This demonstrates to your card issuer, and in turn the credit chest of drawers that you can responsibly manage credit. As your history of moderate accredit use and consistent payments grows, so will your credit grudge. The general advice from experts is to keep your credit rating utilization, the sum of your available recognition that you use, under 30 percentage. thus if you have a secured credit rating card with a $ 200 limit, that ’ sulfur going to mean less than $ 60 in charges each month. “ I initially used my plug tease to make small purchases here and there, ” Edmondson explained. “ such as paying for a few fast food meals a calendar month or buying a modest amount of items at the public toilet store. ” While that may not seem like much, the finish while building credit with a batten card is not to manage your casual expenses with credit—the majority of your spend will probable distillery be covered by cash or debit cards. The finish is to demonstrate responsible credit manipulation to increase your credit opportunities in the future. In fact, it took only a month for McRae ’ s secured card to become separate of his credit history. “ After the plug card was reported on my credit report, I was able to apply and be accepted for an unbarred wag, ” McRae said .

Understand and keep an eye on your credit score

If you ’ rhenium hoping to use a secured recognition menu to improve your credit score, it ’ mho important to know how your credit score is calculated. Your FICO score, for example, is calculated on the succeed five components :

  • Payment history (35 percent)
  • Amounts owed (30 percent)
  • Length of credit history (15 percent)
  • Credit mix (10 percent)
  • New credit inquiries (10 percent)

like factors are besides considered for your VantageScore, although they are weighted differently. Don ’ thymine worry, you don ’ t need to be besides concerned with the unlike accredit score models. The basic principles of building citation are the same : Make minor charges on your secured credit circuit board every calendar month and then pay them off on fourth dimension and in full. Most banks and accredit card issuers offer tools to help you track your citation score, and many of those tools are free. The best tools for credit monitor provide insights into recent credit score changes arsenic well as offering tips to help you continue improving your credit. Use these credit trackers to keep an eye on your credit grudge and ensure it ’ sulfur going in the right direction. “ I got to see my score slenderly rising as I used and paid off the fasten card each calendar month, ” Clark said .

You won’t be stuck with a secured card forever

If you ’ re anxious about the costs associated with a secured credit card—or if you ’ re concerned that people might judge you for carrying a procure card—don ’ thymine worry. Secured cards look precisely like every other credit card, and most plug calling card issuers regularly review your account to determine whether you ’ re eligible for a security system deposition refund. “ If you use a secured credit card to rebuild your credit, at some point you will get your initial security deposit returned back to you, ” Edmondson explained. “ I fair received my initial situate back from Capital One for one of my secure cards. ” At that item, your secured credit card will efficaciously become an unguaranteed credit rating card, and you ’ ll be cook to move on to the future step in your accredit travel.

McRae continues to use his secured credit circuit board for small purchases—even after building his citation score and moving on to better credit cards. “ I still use my procure circuit board to auto-draft my Netflix account and pay it off at the end of the month, ” McRae said. “ I keep the guarantee poster because it ’ mho my oldest credit rating menu, and the requital history is perfective. ”

The bottom line

If you ’ ra struggling to get approved for a traditional credit circuit board, a secured batting order could be the answer. There are many reasons people turn to secured credit cards. Some are modern to credit, while others are rebuilding after a fiscal reverse. The formula for build credit is the same for everyone : testify creditworthy use by borrowing against your line of recognition and paying it off in full. “ Don ’ t be afraid of accredit cards, ” McRae said. “ If used correctly, they can be a great tool to build your credit score. ”

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