Here's What the Successful Use of Secured Credit Cards Looks Like

By Damian Davila. Last updated 19 May 2017. 2 comments

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The main purpose of secured credit cards is to build or repair a credit score. However, they have to be used in a way that maximizes the advantages. Here are eight strategies that show you what successful use of secured cards looks like. (See also: 6 Unexpected Benefits of Secured Credit Cards)

1. Avoid Secured Credit Card Imitators

Just because it looks and can be used like a secured card, it doesn't mean that it is a secured card.

  • A bank debit card is a digital check that allows you to use your bank account balance to make purchases.
     
  • A reloadable prepaid card lets you access monies without even having a bank account. You load and reload money to the card and spend as you go.

These cards may be confused with secured credit cards because they require "secured funds" (actual money in your account, rather than an unsecured credit card which offers you "credit" that you pay back later). They also don't run a credit check so anyone is approved for it. But while these two types of cards provide convenience for your financial transactions, neither of of them affects your credit score. They aren't the right tools to start or rebuild your credit history.

2. Verify Credibility of Card Issuer

In the world of secured cards, there's the good, the bad, and the ugly. This means that you shouldn't sign up for the first secured credit card that pops up after an online search. If you're not familiar with the financial institution behind the card, look for information under the FTC and Better Business Bureau sites. If the offer of easy credit sounds too good to be true (ever heard those "Bad credit? No credit? No problem!" claims?), it probably is.

Make sure you verify that the financial institution reports your card as an unsecured card from the start (or at least within the near future) to the three credit bureaus (Equifax, Experian, and TransUnion). Otherwise, you'll be doing the financial equivalent of herding cats.

3. Minimize Card Fees

The annual fee for secured credit cards can range. However, there are a few secured cards that have no annual fee. You can still get the same credit building benefits without the extra cost, so shop around for secured cards with the lowest fees.

4. Earn Interest on Your Security Deposit

Before you commit to a secured card, check if you're eligible for a secured credit card that lets you gain interest on your mandatory security deposit. Most people aren't aware that there are a few secured credit cards that let you earn interest on your deposit.

5. Set Up a Small Recurring Monthly Payment

When your credit score is in shambles, using your secured card may seem counterintuitive. However, it's the key to building back up your credit history.

Your payment history counts for 35% of your FICO credit score. Paying your credit accounts on time has the highest weight on your credit score. By setting up a small recurring monthly payment (e.g. $10 subscription to cloud software or $20 Internet bill), you're setting yourself up for success by making an on-time payment every single month. If your card offers the option to make automatic payments, take it.

6. Pay Your Balance in Full Every Month

This allows you to maintain a low credit utilization ratio, which determines 30% of your FICO score. A rule of thumb is that you want to keep your credit utilization ratio below 30%. Here's an example: If you have a total of $10,000 available for credit, you should borrow $3,000 at the most. Keeping no balance on your secured card contributes positively to your total credit utilization.

7. Increase Your Credit Limit

Remember that you can increase the limit on your secured card by making additional deposits. This is another way to improve your credit utilization ratio.

When you have several maxed-out cards, you have almost no chance that your creditors will raise your credit limit. By making an additional $500 deposit to your original $300, you bump up immediately your secured card's limit to $800. No credit check needed.

By paying down the balances on your other debts and increasing the limit of your secured card, you're improving your credit score on two fronts.

8. Monitor Your Credit Score

During the first year of your secured card, it's a good idea to monitor your credit score. By seeing your progress, even if it's just by a few points, you'll have a better chance of sticking to your credit rebuilding plan. The instant gratification of watching your score go from 550 to 555 is a powerful motivator to keep on going.

Some cards offer free credit monitoring tools, which may include a credit score. If your secured card doesn't offer one, consider signing up for a credit monitoring service through one of the three credit bureaus. It is a worthwhile short-term investment to keep you on track towards rebuilding your credit history. If your goal is to meet the requirements from a specific lender, ask the lender what score is used in evaluating your application.

Once you have improved your score and you understand how to keep it improving, you can cancel the credit monitoring service.

Responsible use of a secured card may improve your credit score. By following these eight strategies, you'll be on your way towards a better financial situation.

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Guest's picture
Brett Vaughan

This is an exceedingly helpful article. My son who is 17, got a card in the mail that was one of these fake cards posing as a real deal and I was severely upset first of all that they marketed this crap to him in the first place, and second, that someone underage could even GET sent one of these. Everyone needs to be aware of what a real secured credit card is, looks like and is used for. Beware the scammers.

Damian Davila's picture

Glad to help, Brett. You're absolutely right that there are some terrible lenders out there. Credit cards are often useful to build good credit history. However, this doesn’t mean that you should go ahead and get any credit card. There are some really bad deals out there and then there are some terrible deals. Before the 2009 Credit Card Act, some banks would issue unsecured cards with a $250 credit limit with a total of up to $276 in fees. Yes, the fees could exceed the credit card’s limit.

Guest's picture

I totally agree with your point about finding a credible issuer. I used to work as a credit analyst for a Fortune 500 bank and we dealt with people getting secured cards all the time. Sadly, they don't read the fine print and the very secured card that was supposed to help rebuild their credit has now destroyed it. All great tips, and thanks for sharing!

Damian Davila's picture

You're welcome, Chris. There are some really bad lenders out there. Some have a long history of predatory lending on people with poor credit ratings. For example, there were a couple of companies in the San Diego area offering cards with a 79.99% APR. Crazy!