Building Credit with a Secured Credit Card: A Comprehensive Guide

At O1ne Mortgage, we prioritize consumer credit and finance education. We understand that building or improving your credit history can be challenging, especially if you are new to credit or have faced financial setbacks. One effective tool to help you on this journey is a secured credit card. In this blog, we will explore what a secured credit card is, how to use it to build credit, and additional strategies to enhance your credit score. For any mortgage service needs, feel free to call us at 213-732-3074.

What Is a Secured Credit Card?

A secured credit card functions similarly to a traditional credit card, with one key difference: you must make a deposit as collateral to open the account. This deposit reduces the card issuer’s risk, making secured cards easier to qualify for than many traditional credit cards. Typically, your credit limit is equal to the amount of your security deposit. For example, a $200 deposit would result in a $200 credit limit. If you default on payments, the card issuer will use the deposit to cover your outstanding balance. However, if you maintain timely payments, your deposit will be returned to you when you close the card in good standing or upgrade to an unsecured card after several months of responsible use.

How to Use a Secured Credit Card to Build Credit

Secured credit cards can help you build credit just like traditional cards. The key is to use your card regularly and responsibly. Here are some steps to maximize the benefits of a secured credit card:

1. Choose the Right Card

Look for a secured credit card that reports to the major credit bureaus—Experian, TransUnion, and Equifax. This is essential for building a credit history. Additionally, choose a card with favorable terms, such as no fees and a low minimum deposit. A card that offers the opportunity to upgrade to an unsecured credit card is also a good option.

2. Use the Card Regularly

Simply having a secured credit card isn’t enough; you need to actively use it to build your credit. Make small purchases on your credit card regularly and pay them off. An inactive credit card may eventually be closed, which could negatively impact your credit.

3. Keep a Low Balance

Avoid maxing out your credit card. High balances are harder to repay and can negatively impact your credit score due to a high credit utilization rate. Instead, use only a small portion of your credit limit to keep your balance low relative to your credit limit. Aim to keep your balance below 30% of your credit limit, but the lower, the better for credit scores.

4. Make All Payments on Time

On-time payments are crucial to building your credit. Payment history is the most significant factor in your credit score, and late payments can stay on your credit report for seven years. Ideally, pay your balance in full each month. If that’s not possible, aim to make at least the minimum payment by the due date.

5. Monitor Your Credit Score

Regularly check your credit score to track how your credit card use is affecting your credit. An unexpected drop in your credit score could indicate an error on your credit report, which you should address immediately. You can check your credit score for free with various services to see where you stand.

How Much Will a Secured Card Help Your Credit?

It’s impossible to predict exactly how much your credit can improve by using a secured credit card, as it largely depends on your credit history. However, using a secured card responsibly can help you build credit over time. Here’s how your secured credit card use could help boost your credit score:

• Payment history: Using a secured credit card can help you establish a track record of paying on time when your payment history is reported to the credit bureaus.
• Amount of debt: Keeping a low balance on your secured credit card helps you maintain a healthy credit utilization ratio.
• Credit age: Keeping your secured credit card open longer shows you have more experience with using credit.
• Credit mix: As you add other forms of credit, having a secured credit card will help diversify the types of credit you have.
• New credit: Opening a secured credit card may cause a short-term dip in your credit score due to the hard inquiry on your credit report, but your score can recover as the initial inquiry ages.

More Ways to Build Credit

In addition to using a secured credit card, there are several other ways you can build your credit:

Become an Authorized User

Consider asking a family member or friend to add you to one of their credit cards with a long, positive credit history. As an authorized user, you can benefit from the credit card’s existing account history. You won’t be responsible for making payments on the account, but if it’s included on your credit report, your credit score may increase.

Use a Credit-Builder Loan

A credit-builder loan works in reverse to a typical loan: The loan amount is deposited into a bank account while you make monthly payments toward it that get reported to the credit bureaus. At the end of the loan’s repayment term, the loan—possibly plus interest—is yours to keep. Just make sure the lender reports to all three credit bureaus before applying.

Ask a Family Member or Friend to Cosign a Loan

If you need to borrow money and have a trusted relationship with a family member with good credit, asking them to cosign a loan can help you build credit. Keep in mind that any late payments you make will appear on their credit report, too, so it’s critical that you make every payment on time.

Get a Boost from Your Regular Bills

You can benefit from timely payments on your regular bills by using a feature like Experian Boost®. With your authorization, qualifying bills including utilities, rent, insurance, and streaming services can be added to your credit report and could help build your credit score. This can be especially beneficial if you have a thin credit file with few credit accounts.

Don’t Close Old Accounts

Older accounts help boost your credit age, showing you have more experience using credit. It’s best to leave these accounts open, using them periodically to keep them open and active.

The Bottom Line

A secured credit card is an excellent option if you’ve had trouble getting approved for a traditional credit card. Many of the best secured credit cards have a low security deposit, making it easy to get started. As you use your credit card, monitor your credit score. Improvements in your score show that your responsible credit use is paying off.

At O1ne Mortgage, we are here to help you navigate the complexities of building and improving your credit. For any mortgage service needs, call us at 213-732-3074. Our team of experts is ready to assist you in achieving your financial goals.