How to Use a Secured Credit Card: 5 Tips for Success

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When you’re looking for new secured credit cards, it’s always important to make wise financial choices. Your smart decisions in managing your credit with a secured card can help your credit score rise, making it easier to get the unsecured financial products you may need later.

Fortunately, it’s easy to get on the right path when you have a secured credit card. Here’s an overview of what secured credit cards are, how they work and five secured credit card tips that can help you achieve your financial goals.

What Are Secured Credit Cards?

Secured credit cards are usually viewed as solid borrowing options for people with no or low credit. They work similarly to traditional credit cards by allowing you to charge purchases up to your set borrowing limit. However, with a secured credit card, you put down a security deposit. Usually, the size of that deposit matches your secured card’s spending limit.

The reason lenders require the deposit for a secured card is that it reduces their overall risk level. As a result, they can be more flexible when evaluating applications. Secured cards allow them to consider borrowers with no or bad credit with greater ease.

In some cases, secured credit cards may not involve a credit pull at all. Instead, the lender looks at other factors to determine creditworthiness, including the borrower’s ability to put down the deposit, their income level and similar criteria. As a result, a secured card can be a solid choice if you have poor or no credit and aren’t able to get a traditional unsecured card to start building your credit score.

How Do Secured Credit Cards Work?

Aside from requiring a security deposit to open the account, secured credit cards work like their unsecured counterparts. You have a credit limit that sets the maximum amount of debt you can carry on the card. Additionally, there’s an interest rate — usually listed as an APR — and a minimum monthly payment amount.

As you pay off any amount you owe, you can then use that part of the credit line for new charges. That’s why credit cards are referred to as “revolving”; you can continuously pay down the amount you owe and then spend up to the credit limit again. It creates a potentially never-ending cycle.

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By practicing good judgment, you can use a secured card to improve your credit score. Often, that means making the required payments on time and limiting any borrowing activity to 30% of your credit line.

However, mistakes can harm your credit score. Missed payments, maxing out the card and similar actions could lead to derogatory remarks that push your score down. Plus, depending on the terms, certain activities could cause the lender to seize your deposit to pay off your balance and close the account, which isn’t ideal. When you use it responsibly, though, a secured card can be your stepping stone to better credit and financial products you weren’t able to access before.

5 Tips for Secured Credit Card Success

1. Don’t Choose Just Any Secured Credit Card

Like unsecured credit cards, secured credit cards come with unique benefits and drawbacks. Some have lower APRs. Others come with cashback rewards, lower minimum deposits and other beneficial features.

Which secured credit card is right for you depends on your unique needs and preferences. For example, if you travel internationally, having a card with no foreign transaction fees might be appealing. But that feature won’t be a deciding factor if you don’t plan on using the card outside the United States. You want to look at what every card brings to the table before you start applying.

2. Plan to Pay Off Your Balance in Full Every Month

In many cases, secured credit cards come with higher-than-average interest rates. Even small balances may generate a surprising amount of interest, which can take a big bite out of your monthly budget.

Paying off your balance in full every month is a smart financial move. It helps you make sure you aren’t overpaying for borrowing money. Plus, by keeping your balance low, you maintain a favorable credit utilization ratio. As a result, your credit score may rise faster.

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3. Don’t Use the Card for Splurges

When you have a new credit card, it’s tempting to reward yourself with a small splurge. But, that can make you alter your mindset about using credit for unnecessary purchases, which can lead to high balances down the line.

However, it isn’t necessarily smart not to use the card at all, either. In some cases, you need regular activity to keep the account open and ensure it reports your financial choices to the credit bureaus. You may want to create positive activity by using the credit card for a couple recurring purchases, such as covering the cost of one or two streaming services. Then, you can pay off the balance every month so debt doesn’t build up.

4. Take Advantage of Alerts

Many secured credit card accounts allow borrowers to turn on a range of activity alerts to help them monitor their accounts. Often, you can get notified of new transactions, getting close to your limit, payment due dates and more.

By turning on alerts, you can stay apprised of any account activity. Plus, notifications can help you remain vigilant about your balance and upcoming payment due dates so you don’t accrue too much debt or accidentally miss a payment.

5. Keep an Eye on Your Credit Score

While secured credit cards are helpful when you need to build or improve your credit score, they’re often more expensive than traditional unsecured cards. It’s wise to monitor your credit score as you use your secured credit card. Then, once it improves enough, see if you can transition to an unsecured card with more favorable terms.

In some cases, secured cards come with programs that allow you to move over to an unsecured card with the same lender once you complete specific steps, like making on-time payments for a certain period. However, you may find a better deal elsewhere, particularly once your credit score rises into fair or good territory. It’s wise to keep an open mind so you can move to a new credit card that more effectively meets your financial needs.