How to Build Credit with a Secured Credit Card

Have you wondered what a secured credit card is? What about the difference between a secured and a "regular" credit card? Could you get approved for a secured credit card if you've been denied for an unsecured credit card? Read on to learn the difference and how a secured credit card can help you build or repair your credit.

What is a Secured Credit Card

A secured credit card is a credit card with a cash deposit as collateral. Think of it like your security deposit when renting a space, which you can get back after you upgrade to an unsecured credit card or close the account. Your deposit will be used to cover any fees or the balance owed on your card at the time of closing. If you're unable to make payments, the money in your deposit is used to pay for the balance. Usually, the security deposit is the same or slightly lower than the credit limit you're approved for. Generally, you have the option to ask for a lower credit limit if you prefer. Other than that, a secured credit card works the same way a regular credit card does, and no one but you and the credit card issuer will know that it's a secured card.

How Does a Secured Credit Card Work

A secured credit card requires a security deposit, so if you cannot pay the balance on your card for whatever reason, it can be paid with your deposit. The credit limit is usually equal to or a bit less than your security deposit. Secured credit cards also generally have higher interest rates or fees but work just like regular credit cards. The goal is to build healthy financial habits like making on-time payments and having a low balance on your card since your balance and payment history are reported to the major credit bureaus and can help to build or rebuild your score.

After you build a positive payment history with the credit card provider and don't overspend or keep it maxed out, you'll be much more likely to get approved for an unsecured credit card and get your security deposit back.

What is the Smartest Way to Use a Secured Credit Card

Use it just like you would a regular credit card. You want to use your card responsibly (only use it when you know you can pay it back) and pay back what you borrow. A few tips for using credit cards wisely:

• Grace period
  Most credit cards offer you a short period of time to pay back what you borrowed before you're charged interest. This grace period is usually around 30 days or whenever your credit card statement is generated. If you find yourself short on cash, you can use your credit card instead of applying for a personal loan, but make sure to pay it in full if you can so you can pay less in interest.
• Pay your balance in full
  If you can, pay your card in full each month. If that's not possible, do your best to pay it off as soon as possible.
• Understand your card agreement
  This is big! Your cardholder agreement outlines all the rules you need to follow to avoid fees, penalties, and higher interest rates.
• Keep old cards open
  Keeping older credit cards open can help maintain your credit history and low credit utilization. However, if you feel tempted to use them at all (we've been there!), close the card. It can be better to take a temporary dip in your credit score than go into debt you may not be able to pay back.

How Much Should I Put on a Secured Card to Build Credit

There is not necessarily a magic number, but try to keep it to less than 30% of your credit limit. If your limit is $600, keep your balance to $200 or less. Try using it for smaller purchases like gas and paying off your card each month to show a positive payment history. If you use it for more than that or something big and get close to your credit limit, do your best to pay it off as quickly as possible to pay less interest.

How Quickly Will a Secured Card Build Credit

Building credit takes time, and how quickly your score goes up will vary a bit from person to person because there are multiple factors that affect your credit score. In general, you should see changes to your credit score in three to six months as you build a positive payment history.

How Do I Use a Secured Credit Card to Build Credit

Building credit with a secured credit card is just like borrowing with other types of credit (like unsecured credit cards and car loans). Make your payments on time, don't borrow up to your credit limit, and watch your score improve.

Making on-time payments is a big part of your credit score, so making all your payments on time is important. Remember that there is usually a grace period for payments, and you are not reported as late unless your payment is more than 30 days late. Try setting up automatic payments so you don't forget.

Borrowing up to your credit limit means you have a credit utilization rate of 100%, which you don't want. This ratio refers to your balance compared to your credit limit. For example, if you have a credit limit of $500 and a balance of $250, your credit utilization ratio is 50%. Try to keep it around 30% or less.

You'll also want to monitor your credit report to see how your credit behavior impacts your score. Get a free report once a year from www.annualcreditreport.com. Check for inaccurate information that can negatively impact your score so you can submit a dispute if necessary.

How to Choose a Secured Credit Card

Look for cards with no annual fees, reasonable security deposit requirements, and a low interest rate. Some secured cards offer rewards or cashback, which is a nice perk as you build your credit. Other than those points, double-check that they report the payment history of their secured credit card to at least one of the three major credit bureaus so your card can help build your credit. Ask your bank to see if they offer a secured credit card since you already have accounts there.

WaFd Bank is Here to Help

Whether you're looking for ideas to help you better manage your money or applying for a credit card or loan, no question is too small for our friendly bankers. And, with WaFd Bank, you also have access to tools and services to help you manage your finances and get the most from your money. Visit us at your neighborhood branch, give us a call at 800-324-9375 , or see if our secured credit card is right for you.

Terms and conditions apply, subject to credit approval.