How to Use a Secured Credit Card to Build Credit

Divorce, unemployment, a death in the family, or just a stretch of bad luck: there are many reasons your credit score might have taken a dive. It happens to the best of us—circumstances beyond our control can impact our financial health.

If your credit has seen better days, you may be wondering what the best way is to give it a boost. Using credit wisely is, of course, the best way to mend a poor credit score; but if you can’t get approved for a credit card in the first place, how can you prove that you’re capable of turning over a new leaf?

One way to improve your credit score is to use a secured credit card. What is a secured credit card, you ask? Here is a primer on the ins and outs of secured credit cards and how to use one to get your credit score back into the good, and even excellent, range.

Put simply, a secured credit card is a card that is backed by collateral—yours. With an unsecured card, the issuing bank is taking a risk on you. They extend a line of credit and trust you to pay back the money, based on your good credit history. With a secured card, the bank wants some guarantee that they will get their money back, because your credit history is spotty. So you put up whatever amount of money you want your line of credit to be: anywhere from $200 to $2,000, generally.

The difference between a secured card and a prepaid card

After putting down this deposit, you’ll be approved for your secured credit card. This may seem a little like a prepaid card, but it’s completely different. With a prepaid card, you load money onto the card, and then use it up. With a secured card, you put money down up front, it’s true, but when you use the card, that money doesn’t go anywhere. The issuing bank is still giving you credit, and you will still receive a bill each month. Pay that bill in full, on time, and slowly but surely, your credit score will begin to improve. The collateral you’ve put up will simply sit with the issuing bank, acting as insurance in case you default on your loan.

Things to watch out for

There are a couple of things to be aware of with secured cards. The first and most important one is, you must make sure that the credit card issuer reports to a major credit bureau. If the card issuer doesn’t report your activity to a credit bureau, your credit score won’t improve. So before you apply for a secured card, call the customer service line and ask which bureau they report to. It should be one of the big three: TransUnion, Experian, or Equifax.

The second thing to look for with secured cards is the fee schedule. Some secured cards have high fees. Any secured card will probably have some fees, as cards for people with poor credit tend to come with fees. But look around and choose one with the lowest fees you can find.

With some patience, your credit score can improve after responsible use of a secured credit card.