How Do Secured Credit Cards Help Build Credit
A secured credit card account can help you build your credit in multiple ways.
For instance, lets say that you are just starting out on your credit journey and have only a loan account reporting . Qualifying for an unsecured credit card may be difficult, so you decide to start with a secured card.
You put a $500 security deposit down in exchange for a $500 credit limit.
If you pay your statement balance in full and on time every single month, this will provide a boost to the payment history portion of your score, which has the biggest impact on your credit score .
Next, you decide to only charge your $50 water bill to the card each month. This gives you a utilization rate of only 10%, which is the ideal level for maxing out the part of your score.
For each month you have the secured credit card account open, youll be building your length of credit history.
And since you already have an installment loan, adding a revolving account will improve the portion of your score.
Now, if you have bad credit, how a secured credit card can help your credit score changes a little bit.
Why do you have bad credit?
If you are carrying too much debt, a secured credit card can help your utilization rate, which will improve your score, but you can supercharge your progress by also working on paying down your existing debts. Aim for a utilization rate of 10% or less for best results.
Now, lets look at the worst-case scenario for a minute.
How Do Secured Vs Unsecured Credit Cards Compare
Lets take a look at some of the differences youll typically find with secured vs. unsecured cards.
Keep in mind, though, that every card has its own nuances and quirks. Its important to understand all the features, benefits and terms of each individual card youre considering, regardless of whether its secured or unsecured.
Here’s What To Expect When You Decide To Make The Switch
Secured credit cards are often the go-to option for applicants with no credit history or poor credit. These cards are a solid tool to help you build or rebuild your credit history, especially when you cant get a credit card in any other way.
With a card that reports your responsible spending and on-time payments to all three credit bureaus, you can further boost your overall credit score.
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Monitor Your Credit Until You Graduate From A Secured To An Unsecured Credit Card
Regularly reviewing your credit report to avoid errors might also help your credit score if you spot something incorrect. The Fair Credit Reporting Act requires the three major credit bureaus Equifax, Experian, and TransUnion to provide a free copy of your credit report annually upon your request. If you see an error, you should submit a dispute letter to the credit bureau as soon as possible.
If you follow these simple guidelines by paying your secured credit card on time, staying within the credit limit, and regularly making at least the minimum payments on time on any credit accounts that you have you may be able to maximize your chances of graduating to an unsecured credit card.
If you prefer not to receive your FICO® Credit Score just call us at 1-800-DISCOVER . Please give us two billing cycles to process your request. To learn more, visit Discover.com/FICO.
Legal Disclaimer: This site is for educational purposes and is not a substitute for professional advice. The material on this site is not intended to provide legal, investment, or financial advice and does not indicate the availability of any Discover product or service. It does not guarantee that Discover offers or endorses a product or service. For specific advice about your unique circumstances, you may wish to consult a qualified professional.
Merrick Bank Secured Visa Card
Merrick Bank Secured VISA card has a $36 annual fee. This gets billed off your deposit after the first year. Say you deposit $500, well it will drop to $464 once a year is up.
Merrick Bank Secured VISA card has a $36 annual fee. This gets billed off your deposit after the first year. Say you deposit $500, well it will drop to $464 once a year is up.
You get a 17.45% APR rate with it. If you keep paying on time, they will start offering increases to your credit limit. As this happens, you wonât have to give any more towards the deposit. Simultaneously, you keep getting part of your funds back through the annual fee that gets taken off your deposit.
This gradual conversion is a terrific way to turn secured into an unsecured one. The only problem is that it will have collateral for a while, which means it will continue to report as a secured card on your credit file. This still helps you build your credit rating up, but itâs not impacting a quality history with an unsecured credit card.
Wells Fargo Secured Card , BankAmericard Secured Card .
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How To Graduate From A Secured To An Unsecured Credit Card
Secured credit card graduation depends on your credit card issuer and on demonstrating that you can be trusted with more responsibility. Credit card issuers will look at your secured credit card usage for a period of time to determine if youre managing your credit responsibly.
Whether you can graduate from a secured credit card to an unsecured card can vary between credit card issuers. With some that allow for graduation, it can take between several months to a couple years depending on a few factors, including where your credit score was when you got the secured credit card and the policies of that specific credit card issuer. With the Discover it® Secured Credit Card, after seven months, Discover will begin automatic monthly account reviews to see if you qualify to upgrade to an unsecured card and get your deposit back.*
Some secured credit cards do not offer the option of graduating to an unsecured card. Instead, you would have to apply for a new unsecured card.
Option : Close Your Secured Card And Apply For A New Unsecured Credit Card
If your secured credit card issuer doesn’t offer an upgrade option, your next best option is to apply for an unsecured card from a different issuer and close your secured card completely. Since you have to pay a security deposit in order to have a credit limit on your secured card, it’s really not worth holding onto. So once you see an increase in your credit score, you should start researching new cards.
Before you apply for a new card, shop around and take note of the credit scores required to qualify for certain cards. We recommend looking for a credit card that offers a low APR or no annual fee to make the transition easier on your finances.
How to do it: To cancel your credit card, simply call the number on the back of your secured card to speak to a representative and let them know that you would like to permanently close your account.
If you had the Capital One Platinum Secured Credit Card for its low deposit option, for example, you wouldn’t be able to upgrade and transfer information over to an unsecured card. Capital One cardholders would have to reapply for a specific rewards card, like the Capital One SavorOne Cash Rewards Credit Card to earn an unlimited 3% cash back on dining and entertainment, 3% back at grocery stores and 1% back on all other purchases all without paying an annual fee.
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How Do Secured Credit Card Deposits Work
With a secured credit card, the amount of cash that you put down as a deposit becomes your the amount you can charge on the card. Since the deposit made to open the secured credit card account serves as collateral, it is not accessible to the borrower once it has been paid, but it stays in reserve.
You can lose your deposit, but usually secured card issuers will use it only if you default or miss a certain number of payments. If you cancel the card, you receive your deposit back, assuming your balance is paid off. Alternatively, some secured credit card providers will review a borrowers payment history on a regular basis, and will convert a secured credit card into a regular credit card if they regularly meet payments. In this case, you will also receive your deposit back.
How Do I Move From A Secured Credit Card To A Normal Credit Card
The main goal of using a secured credit card is to improve your credit score to a more comfortable level in order to then qualify for a normal, non-secured credit card. Once you achieve the credit score you desire and pay off the remaining balance, you can reach out to your financial institution to go over the next steps, including the chance to apply for a regular credit card.
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Converting Your Credit Card From Secured To Unsecured
How long before you get an unsecured card?
The amount of time you have to wait before upgrading from a secured to an unsecured credit card varies. Most will make you wait 12 months, but some consider you for an unsecured card at as little as 6 months. Meanwhile, weâve even covered some secured cards that will only convert into unsecured ones after 18 months.
How do you get approved for an unsecured card?
It is all based on how well you performed while maintaining a debt with your issuer. If you have great credit overall now, your credit score alone might qualify you for an unsecured card. However, you could still have poor creditworthiness and be able to qualify for an unsecured if you always paid your bill on time with the issuer.
Do you get your deposit back after you convert?
Most issuers will refund you the security deposit after you convert to an unsecured card. However, you have to be careful as a few secured cards withhold the collateral funds forever. We donât recommend any that do this, though.
What credit limit will you get after converting?
Typically, you will have the same credit limit as right before the conversion. If you had established much better creditworthiness since you applied for the card, itâs possible to get a higher limit once you convert.
Which cards that convert have no annual fee?
What To Do If Your Secured Card Is Unclear About Upgrades
Some secured cards provide murky upgrade details, or simply dont offer other cards to graduate to. The OpenSky® Secured Visa® Credit Card, issued by Capital Bank, isnt part of a larger card family with unsecured card options to eventually switch to.
Similarly, all three of the First Progress cards are secured.
In these cases, you can still get your deposit back, but only once you close the account. If you then want to move on to a new unsecured card, you’ll need to look elsewhere though your options will depend on how much your credit has improved.
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could be a fit if youve attained a FICO score of at least 630.
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You can also consider so-called alternative credit cards, which are offered by financial startups and can use nontraditional underwriting to evaluate applications.
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How Does An Unsecured Credit Card Work
Unsecured credit cards are a type of revolving credit account that doesn’t require any collateralan asset that a lender can take if a borrower doesn’t repay a loan.
When you apply for an unsecured card, the credit card issuer will generally review your credit report, your and information from your application . If you’re already a customer of the financial institution issuing the card, your history with the company may also be considered.
Unlike secured credit cards, you don’t have to pledge any collateral to get an unsecured card. The issuer will either approve or deny your application based on the material it reviews. It may also use this information to help determine your card’s and interest rate.
When you use your unsecured credit card, the transaction amounts are added to your card’s balance, and you can make purchases until your balance reaches your account’s credit limit. Paying down the balance frees up your available creditletting you repeatedly borrow against your credit limit without having to apply for a new line of credit.
At the end of the billing cycle , all your transactions are added together to determine your statement balance. The card issuer will then send you a statement at least three weeks before your bill is due. You can make a minimum payment, pay the statement balance in full, pay the current balance or pay some amount in between.
How Does A Secured Credit Card Build Credit History
The most important factors in building your credit score are your and your payment history. Other factors include the length of credit history, types of credit used and new credit. By using a secured credit card on a regular basis and making your payments on time every month, youll establish credit history due to your payment history.
Another key factor in building credit is keeping your card balance low. Keeping your balance low will show creditors that you dont need to rely strictly on your credit cards. A good credit score rule of thumb is to use less than 30% of your credit line each month to show youre a responsible credit card holder.
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Using Your Secured Credit Card Responsibly May Allow You To Graduate To Unsecured
Before you can go from a secured credit card to an unsecured card, you need to demonstrate that you use credit responsibly. Use your card regularly, but try to keep the amounts you charge to a small percentage of your credit limit. This is because having a lower debt utilization is considered more positive by FICO® Credit Scores.
Its also very important to pay your bills on time, because missed or late payments will likely lower your credit score.
Picking Your Next Credit Card
When youre choosing your unsecured credit card, evaluate your habits with your secured credit card to determine which one best fits you. Here are our recommendations based on how you’ve been using your secured card:
if you occasionally carried a balance, because a low APR credit card will minimize interest payments.
When it comes to perk-filled travel credit cards, we suggest that you bolster your credit scores above 700 to improve your chances of qualifying.
However, even if you qualify for an unsecured card with less-than-stellar credit, expect to receive a small credit limit and higher-than-normal APR.
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Why Make The Switch To An Unsecured Card
The main reason for using a secured card is to increase your credit score. After youve built your credit score to at least 650, you could be ready for an unsecured card.
Unlike a secured card, unsecured credit cards dont require a deposit as collateral. They also typically come with fewer fees and higher credit limits than secured cards. Many unsecured cards also offer great perks for responsible spending, like cash back rewards, points per dollar spent and competitive interest rates.
Where do I begin?
First, look into whether your credit card provider offers an unsecured option. Upgrading to an unsecured version of your secured card can be the easiest way to transition into a better credit card, sometimes allowing you to transfer your account number to the new card. You can also expect to get your deposit back once you pay off your secured credit card balance in full.
- If your secured credit card doesnt offer the option to upgrade, or youre simply in a better position to pick a stronger card elsewhere, start by looking for an unsecured card with no annual feeor a low interest rate.
How long should I wait until switching to an unsecured card?
- When your credit score reaches at least 650, look into an upgrade to an unsecured option you can even consider an unsecured card that offers rewards.
What are the advantages when switching to an unsecured card?
How is my credit score affected by a switch?
Discover It Secured Card
Hands down, Discover it Secured Card is the best-secured credit card on the market. It gives you cashback on all purchases. You get 1% back on everything, but with gas or restaurants, you receive 2% cashback instead. Even better, they double your cashback rewards for the first year.
We recommend you go for the highest credit limit possible. You can give anywhere between $200 and $2,500 as collateral. Once your Discover it card converts to be unsecured, youâll have a much higher starting limit.
The great thing is you get your deposit back when the secured period is over. This money can be used to pay off anything you still owe. So you can start with your unsecured card. Once you have a better FICO score, and your credit utilization rate will be super low. This will protect you from failure as long as you donât do anything crazy with any of your unsecured cards.
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