In this guide, you will learn how a secured credit card can help you improve your score, how long it takes to attain a good score, and how to use secured cards to improve your credit score.
What is a Secured Credit Card?
A secured credit card is a type of credit card that requires an upfront cash deposit to open the account. The cash deposit, known as a security deposit, serves as a form of collateral that minimizes risk to the card issuer.
The security deposit required to get a secured credit card typically ranges from $200 to $2500.
How a Secured Credit Card Works
A high score indicates good credit habits and increases your probability of getting a line of credit. This means that a person with bad credit or no credit history has a low chance of getting a line of credit.
Since there’s no record to evaluate your probability of living up to credit obligations (as is the case of a person with no credit history) or a record of major delinquencies (as is the case of a person with bad credit), its hard to get approved for an unsecured loan if you have no credit history or bad credit.
Unlike regular credit cards, a secured card requires collateral in the form of a refundable deposit to open the account.
Because a security deposit is used as the basis of extending you a line of credit rather than your creditworthiness, the credit limit on your secured card will most likely equal the security deposit you provided.
The security deposit is held by the card issuer in a special savings account while the card is active and serves as collateral rather than a balance you can use to pay off your purchases.
As long as you don’t make late payments and maintain a healthy credit utilization rate, your credit score will scale up over time and you may even have your limit extended.
However, if you default on your payments, your credit score will suffer and the card issuer may be forced to resort to your deposit to cover your delinquency.
Who Should Get a Secured Credit Card?
If you are getting turned down by card issuers when you apply for a credit card, there’s a good chance that the reason is tied to your credit score: it’s either you have no credit history or you have bad credit.
Whichever the case, you need a secured card to build a credit score that eventually qualifies you for an unsecured credit card.
The FICO scoring system is often used as a model for measuring creditworthiness. It is graded into five classes with each class representing a range that is assigned a quality based on certain factors.
The FICO model is based on a scale that ranges from 300 to 850. Scores above 670 are considered good and those below 670 are considered fair (580–669) or poor (300–579).
How Much Will a Secured Credit Card Raise My Score?
A secured card doesn’t guarantee a specific credit score increase and it’s difficult to estimate how much it will raise your score. How much increase you can expect with a secured card depends on your credit situation.
If you have no credit history
Without a credit history, there’s no information to calculate your credit score hence you have no credit score.
If you are starting out (assuming you have good credit habits), it’s unlikely that your first score will be the lowest possible (300 under the FICO model) but it also doesn’t imply that it will be the highest (850) either. A reasonable expectation would be the middle range.
You can expect to get in the fair (580–669) or good (670–739) range if you make timely payments and maintain a low credit utilization rate. Obtaining a credit-builder loan in addition to your secured cards can boost your chances of getting a good FICO score.
If you have bad credit
A bad score is usually the result of past delinquencies such as late payments, letting an account go to collections or a past bankruptcy.
Rebuilding your credit score can be challenging and it’s difficult to say exactly how much a secured credit card can help you scale up your credit score.
This is because there are different scenarios of bad credit.
According to research by FICO and CNBC, minor delinquencies like a late mortgage payment can take up to three months to recover from the resultant drop in your credit score while major delinquencies like defaulted payments can take up to eighteen months to recover from.
More serious delinquencies like home foreclosure and bankruptcy can take three and six years respectively to recover from the resultant drop in your score.
If you have bad debt, a good place to start is to focus on paying off existing debts. This can boost your chance of improving your score while a secured card can help your utilization rate.
By sticking to a utilization rate of 30% or less, you can start making real progress in your rebuilding efforts since credit utilization accounts for 30% of your FICO score.
The effort that can have the biggest effect on your FICO score is making on-time payments.
Since payment history is the most important consideration in FICO score calculations (35%), your commitment to making on-time payments and avoiding late payments at all costs will have the biggest effect on your rebuilding efforts.
To supercharge your rebuilding efforts, you can open a credit-builder account and obtain multiple secured credit cards. This will improve other aspects of your FICO score like new credit (10%), and credit mix (10%).
Regardless of the nature of the bad debt you have, a secured card can help you rebuild credit if you develop good credit habits like paying off existing debts, making on-time payments, maintaining a utilization rate of 30% or less, and using a credit-builder account.
How much increase you will experience in your score will depend on your credit situation.
How to Use a Secured Credit Card to Raise Your Score
If you intend to use a secured credit card to improve your credit score, then you have to use a popular scoring model like FICO as your guide.
There are five factors considered when FICO scores are calculated. Your goal is to develop credit habits that help you maximize these variables rather than have them work against you.
If you are using a secured credit card to improve your score, then you should focus on the popular credit scoring models used by credit bureaus and lenders and use them to prioritize your credit building or rebuilding efforts.
These are the factors used to calculate FICO scores and the percentage that each variable contributes to your score:
- Payment history (35%)
- Credit utilization (30%)
- Length of credit history (15%)
- New credit (10%)
- Credit mix (10%)
To further improve your chances of using secured cards to build or rebuild your credit score, find a secured card that reports to all three credit bureaus and has features that make it easy for you to maintain good credit habits.
The Bottom Line
Although secured credit cards can help you build or rebuild credit, they are not a silver bullet. It will take some time to see significant results in your credit score especially if you have bad credit.
Committing to making on-time payments and maintaining a low credit utilization rate can help you scale up faster. You can supercharge the process by obtaining a credit-builder loan.
How fast will my credit score go up with a secured credit card?
It depends. If you are starting from scratch, it means you don’t have a credit score and it takes at least six months to get a FICO score. If you maintain good credit habits, you will get a good starting score which you can continue to build. If you have bad credit, then you need time, patience, and good credit habits to rebuild your credit. It’s unlikely you would see significant changes until after a year.
Will increasing my secured credit card limit help my credit score?
Yes, but there’s a caveat: increasing the limit on your secured card is only helpful if you don’t use it as a reason to increase your spending, that way you drive your utilization rate down and improve your chances of enhancing your credit score.
How much will a credit card raise my score?
When it comes to the effect of credit cards on credit scores, your current credit situation is always the determining factor. While a credit card can raise your score over time, you might experience a temporal drop in your score when you apply for a new card. Depending on what your current situation is, the drop can be either the result of a hard pull or the effect of adding new credit, or both.
How can I build my credit with a $200 secured credit card?
Avoid late payments, maintain a low credit utilization rate (less than 30%), and if possible, take a credit-builder loan.