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How to Build Credit with a Secured Credit Card

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.

By
Laura Adams, MBA,
Episode #437

How a Secured Credit Card Helps You Build Credit

Even though you spend your own money, some, but not all, secured cards report your payment data to one or more of the three nationwide credit bureaus: Experian, Equifax, and TransUnion.

Now that you understand what a secured credit card is, let’s cover exactly how it can help you build credit no matter if you’re starting from scratch or rebuilding after going though a financial hardship.

At first glance you may think that a secured credit card is similar to a prepaid card that you load with funds and then use like a regular credit card. But a prepaid card is actually more akin to a debit card, which never helps you build credit because they don’t give users credit or report your payments to the credit bureaus.

The major benefit of a secured card is that it can be a real credit account, similar to a regular credit card. Even though you spend your own money, some, but not all, secured cards report your payment data to one or more of the three nationwide credit bureaus: Experian, Equifax, and TransUnion.

So, your secret weapon to build credit is to apply for a secured card that reports your payment history to the credit bureaus! Don’t spin your wheels with a secured card that doesn’t. A history of making on time payments—even if they’re just the minimum payments—helps build your credit.

How Does Credit Utilization Affect a Secured Credit Card?

Another factor in your credit score calculation is called your credit utilization ratio. It’s the percentage of your credit limit that you’ve used up. For instance, if you have a $1,000 credit limit and a card balance of $500, you have a 50% utilization.

The lower your utilization the better. I recommend never exceeding 20% of your limit on either a secured or an unsecured credit card—especially when you’re trying to build or rebuild your credit. Remember that this could be a tiny amount if you make a small deposit. For instance, 20% of a $200 credit limit means you should never charge more than $40.

If you use a secured card strategically by making payments on time and keeping your utilization low, you could see a substantial increase in your credit scores in as little as six months. Likewise, not making payments on time or maxing out your card can hurt your credit.

See also: Credit Utilization—What It Means for Your Credit Score

Can a Secured Credit Card Help Repair Bad Credit?

If you mismanaged your credit in the past or experienced a financial hardship, using a secured credit card can be a lifeline back to good credit.

If you mismanaged your credit in the past or experienced a financial hardship, using a secured credit card can be a lifeline back to good credit.

A Money Girl Podcast listener named Harue S. is rebuilding her credit after going through a financial rough patch. She says, “My father offered to pay off my student loans so I can pay him back at a lower interest rate and save money. But I don’t want my credit to suffer because I pay off a large chunk of debt all at once. My credit was in bad shape a few years ago but now it’s finally getting better. Do you have any advice?”

Your payment history doesn’t just disappear after you pay off a loan or close a credit card. Accounts with no late payments remain on your credit history for 10 years, and those with late payments stay for 7 years.

So my recommendation for Harue is to weigh the pros and cons of her father’s offer. Saving money by repaying a debt at a lower interest rate is a smart strategy.

However, if she has federal loans, they come with repayment options such as income-based repayment and forbearance designed to help you during a hardship, such as losing your job. These benefits obviously wouldn’t apply if her father pays off her student loans and holds the debt.

But if Harue has a good relationship with her father and he isn’t dependent on her loan payments for income, they could likely work out a different payment arrangement if needed.

One point to remember is that if you have a credit history that includes bad marks like late payments, accounts in collections, or a bankruptcy, it could take longer for good activity on a secured card to boost your scores—but it’s still worth the time and effort.

So I recommend that Harue apply for a secured card to help rebuild her credit no matter what she does with her student loans.

See also: 5 Student Loan Repayment Options

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