Ready to improve your credit scores? Laura answers credit questions from podcast listeners and readers. She explains what a secured credit card is, where to find one, and how to use the account to build or repair your credit no matter your situation.
A Common Misconception About Credit Scores
In order to have good credit you must have credit accounts and use them responsibly.
A common misconception about credit is that if you have no debt, you must have good credit. That’s completely false. In order to have good credit you must have credit accounts and use them responsibly.
Unfortunately, having no credit is the same as having bad credit. A “thin” credit history means you don’t have enough data in your file to generate a credit score. Without a credit score, lenders and merchants have no way of evaluating how likely you are to repay your bills and are likely to deny you credit.
So what’s someone who’s just starting out, like Linda, or who’s returning to the U.S. after a long time, like Rosemary, supposed to do? It can seem like a catch 22. You can’t build a credit history without a loan or credit card, but you can’t get one without having a good credit history!
Fortunately, using a secured credit card the right way is an easy way to build credit. And by the way, credit scores in the U.S. are tracked by your Social Security number. That means any resident who qualifies for a Social Security number and has credit accounts can build a credit file here.
Free Resource: Credit Score Survival Kit (free multimedia tutorial)
What Is a Secured Credit Card?
First I’ll cover what a secured card is and then explain how to use one strategically to build credit as quickly as possible.
A secured credit card is similar to a regular, unsecured credit card in many ways:
- They look the same.
- They can be used to make purchases at the same stores.
- They require a minimum monthly payment on balances.
- They charge interest if you don’t pay off your balance in full by the statement due date.
- They may charge an annual fee.
- They may offer a variety of benefits, such as fraud coverage, price protection, extended warranty, or travel accident insurance.
Although you can use a secured card just like a regular one, it’s a different financial tool. The main difference is that you’re required to put up a refundable security deposit that becomes your credit limit.
With a regular credit card, you never have to make a security deposit once you’re approved. You automatically receive a credit limit based on various factors such as your credit rating, income, history with the issuer, and type of card you choose.
A secured card asks for an upfront deposit because it reduces the issuer’s loss if you don’t pay your bill. They hold your deposit as collateral until you close the account and pay your balance in full—or prove your credit-worthiness and transition to one of the issuer’s unsecured cards.
Your deposit does not accrue interest, nor is it used to cover your bill. You still have to make minimum monthly payments, just like with a regular unsecured card. If you don’t, the issuer can tap your deposit and report your late payment to the nationwide credit bureaus. I’ll tell you more about that in a moment.
The minimum required security deposit varies depending on the secured card you choose. Some issuers may only require $50, but others may ask for several hundred. In some cases, you may be able to pay a deposit in installments over a certain period of time, such as 60 or 90 days, before your card is issued.
If you deposit $300 on a secured card, your total charges can never exceed that amount. So, if you anticipate using it for large purchases, such as airline tickets, electronics, or furniture, you’ll need to make a bigger initial deposit.
If you want to increase your initial credit line, most secured cards allow you to make at least one additional deposit. The maximum deposit varies, but many are in the range of $3,000 to $5,000.