A secured credit card can be a great way to rebuild your credit history if you have had some financial troubles in the past. Secured cards are much easier to get approved for than traditional unsecured credit cards, and they can be a helpful tool in repairing your credit score. In this guide, we will walk you through how to use a secured credit card for your benefit. We will cover everything from how to apply for one to how to make the most of your spending power. Let's get started!
How to Use a Secured Credit Card Table of Contents
What is a Secured Credit Card?
A secured credit card is a type of credit card that requires you to put down a security deposit, which becomes your line of credit. For example, if you open a secured credit card with a $500 deposit, your credit limit will be $500. This deposit acts as collateral in case you default on your payments, and it's refundable if you close your account and pay off your balance in full.
Why Would I Get a Secured Credit Card?
There are a few reasons why you might want to get a secured credit card:
- To improve your credit score: If you have bad credit or no credit history, a secured credit card can help you build up your payment history and improve your credit score. Just make sure to use it responsibly by always paying on time and keeping your balance low.
- To get a regular credit card: Once you've built up your credit score with a secured card, you may be able to qualify for a regular (unsecured) credit card.
- To avoid a high interest rate: If you have good credit but are worried about being approved for a regular credit card with a low interest rate, a secured card can be a good option. Your interest rate will be based on your creditworthiness, not just your security deposit.
How to Use a Secured Credit Card
When you use a secured credit card, you're essentially borrowing money from the issuer against your own security deposit.
That means that every time you make a purchase with your card, you're borrowing funds that you'll need to pay back with interest (if you carry a balance).
And, like any other type of credit card, you'll need to make at least your minimum monthly payment by the due date to avoid late fees.
Now that you know how secured credit cards work and why you might want to get one, let's talk about how to use it responsibly:
- Make sure you can afford the security deposit: Remember, your security deposit is at risk if you don't pay your bill on time or default on your payments. So only apply for a card that you can afford to put a deposit down on.
- Use it like a regular credit card: The best way to improve your credit score with a secured card is to use it like a regular credit card and pay off your balance in full each month. That means charging only what you can afford and making your payments on time, every time.
- Keep an eye on your credit limit: It's important to keep track of how much you're spending on your secured credit card so that you don't go over your limit. Going over your limit can result in fees and will damage your credit score.
- Review your statement regularly: Be sure to review your statement each month so that you can catch any errors or fraudulent charges right away.
- Pay off your balance in full: This is the most important tip for using a secured credit card responsibly. Always pay off your balance in full to avoid interest charges and late fees. Not to mention, it's the best way to improve your credit score.
Following these tips will help you use your secured credit card responsibly and improve your chances of getting approved for a regular credit card down the road. So if you're looking to build or rebuild your credit, a secured credit card could be a good option for you. Just make sure to use it wisely!
What Is an Unsecured Credit Card?
An unsecured credit card is a type of credit card that does not require the cardholder to deposit any money as collateral. Instead, the card issuer extends a line of credit based on the cardholder's creditworthiness. In other words, an unsecured credit card is a loan that must be repaid with interest.
Most unsecured credit cards have annual fees and higher interest rates than secured cards because they're seen as more risky for lenders. However, there are some unsecured cards available with no annual fee and 0% APR introductory periods. If you have good to excellent credit, you may be able to qualify for one of these cards.
Secured Credit Cards Vs Unsecured Credit Cards
The main difference between a secured and unsecured credit card is that a secured credit card requires a security deposit, which acts as your credit limit, while an unsecured credit card doesn't require a deposit.
A secured credit card can help you build or rebuild your credit history by reporting your activity to the major credit bureaus. You'll need to make regular monthly payments on time and keep your balances low relative to your credit limit in order for this to happen.
Secure Credit Cards Vs Debit Cards
A secured credit card is a type of credit card that requires you to put down a deposit, which becomes your line of credit. For example, if you have a $500 deposit on a secured credit card, your spending limit will be $500. Debit cards are linked directly with your checking account and draw funds from that account to make purchases.
There are benefits and drawbacks to both types of cards. Secured credit cards can help people build or improve their credit score, but they typically have high interest rates and fees. Debit cards don’t help improve your credit score but often have fewer fees than secured credit cards.
How to Use a Secured Credit Card to Build Credit
If you're looking to build your credit, one of the best ways to do so is by using a secured credit card. A secured credit card is a type of credit card that requires you to put down a security deposit, which acts as your credit limit. Using a secured credit card can help you build your credit history and improve your credit score over time.
Can You Put as Much Money as You Want on a Secured Credit Card?
Most secured credit cards will require a minimum deposit, which will become your credit limit. For example, if you deposit $500, your credit limit will be $500. Some banks may allow you to put more money on the card than what is needed for your credit limit, but this isn't always the case. It's best to check with your bank to see their policy on deposits for secured credit cards.
What About Using a Savings Account as Collateral Instead of a Cash Deposit?
Some banks offer the option of using a savings account as collateral for a secured credit card. This means that if you default on your payments, the bank can take money out of your savings account to cover the debt. However, this option is not always available, so it's best to check with your bank to see if they offer this option.
How Much Credit Should You Use on a Secured Credit Card?
Ideally, you should keep your credit utilization at 30% or lower. So, if your credit limit is $500, aim to keep your balance below $150. This shows lenders that you're a responsible borrower who doesn't max out their credit cards. Plus, it can help improve your credit score.
One way to stay within this 30% range is to make multiple payments throughout the month. For example, you could make a payment after using your card for gas and another payment after you've paid your monthly rent or mortgage. By doing this, you'll never let your balance get too high and put yourself in danger of damaging your credit score.
Another thing to keep in mind is that some secured credit cards require a minimum deposit. So, if your credit limit is $200, you may need to deposit $200 into the account to get started. However, there are some secured cards that will allow you to make a smaller deposit and still give you a $200 credit limit. It just depends on the card issuer.
Assuming you've been approved for a secured credit card and have made your initial deposit, it's time to start using your card like any other credit card. This means making purchases and paying off your balance in full each month. If you can do this consistently, you'll not only improve your chances of getting approved for unsecured cards in the future but also help build up your credit score so that you can eventually qualify for the best loan and credit card rates.
Now that you know how to use a secured credit card, it's time to start shopping around for the best option for your needs.
Do You Get Your Deposit Back From a Secured Credit Card?
The answer to this question is a bit complicated. Typically, you will get your deposit back as long as you don't default on your payments or close your account before the card issuer returns it to you. Defaulting on your payments includes making late payments, going over your credit limit, or having your card frozen because of suspicious activity. If you do any of these things, then the card issuer may keep your deposit and use it to cover the cost of whatever damages you've caused.
Closing your account before the card issuer returns your deposit also typically results in forfeit of that money. That's because when you close an account, any outstanding balance must be paid first and if there's not enough money in the account to cover it, the card issuer can take your deposit. So, if you're planning on closing your account and don't want to lose your deposit, make sure you have a zero balance before doing so.