How a secured credit card helped my score –

How a secured credit card helped my score –

Kevins Story

As a junior and senior in college, I was always told that applying for a credit card could be my first step in the wrong direction. With a credit card in hand, my parents worried I would spend money I couldn’t pay off and build a lifestyle I couldn’t really afford, rather than learning to save money.

While these are legitimate concerns, I had to let them know I felt as if I had some control over my spending. My response was always the same: “How would I know until I was able to try for myself?”

What I Learned from Being Denied for Credit Cards

When I was finally prepared to get a credit card on my own, none of the banks I applied to would give me a chance.

It went like this: “I am unemployed, have no credit history, and have a couple of thousand dollars in college debt that I will have to start paying on in the next year or two.”

Not exactly a winning pitch to convince someone to give you a line of credit! Two banks denied me, but one banker was kind and shared some info that has helped me raise my credit score over 100 points in the past five months.

First, I should stop trying to apply for credit cards that would get denied. His reasoning was simple: when you apply, they do a hard credit check which, in turn, can lower your credit score even more.

His second piece of advice was to get a secured credit card.

How a Secured Credit Card Works

He told me that no major bank was going to accept my credit application, but there was actually an alternative option available – one which was especially perfect for those in my exact situation: to sign up for what is called a secured credit card.

While the terms for these are horribly one-sided in favor of the lender, I assure you it is a small price to pay for the result you receive after only a few months.

With secured credit cards, you give the lender a cash deposit up front, and that cash deposit is typically equal to your credit limit.

This process truly confused me at first, since I thought the deposit was money I could actually spend. What I learned, however, is that the deposit is there in case I default.

I couldn’t spend the deposit itself, but I would get it back if I kept my account in good standing until I closed the card.

After you make your deposit, secured cards are also treated just like traditional credit cards. Your secured card will typically look and act just like a regular credit card, so no one will know it is secured.

There is also an annual fee associated with most secured credit cards, but I felt it was a small price to pay for the opportunity to build some credit history.

How To Maximize the Benefits of Your Secured Credit Card

When I first checked my credit score with MyFICO in March of 2011, it was sitting at 621.

I set up my new secured credit card with a credit limit of $1,100. The credit limit should be a function of what cash you have, and also what you plan on using the credit card for.

According to many bankers and friends I talked to, you should try to run a 75% utilization rate on your credit card to maximize your potential to raise your credit score.

So, if you only spend around $300 a month, you should give your secured credit card a $500 down payment so that you are utilizing your credit rather than having a $1,000 dollar limit and only spending $300.

My expenditures were approximately $700 dollars a month so the $1,100 dollar limit fit my needs.

How I Raised My Credit Score Over 100 Points

Raising my credit score with a secured card took some disciplined, conscientious spending.

Here are the rules I followed to maximize the benefits of my secured credit card.

  • Spend what you have: After I received my secured card and started spending, I made sure that I would only spend money I already had or would receive, before the next pay period.
  • Pay often: I ended up paying off my credit card roughly four times a month to ensure I never carried a balance from one month to the next.
  • Know your limits: I would never let my credit limit exceed $800, and I would never pay it off if the card balance was under $300 unless the pay period was coming to an end.
  • Make purchases: I would put every penny of my spending on the credit card – from the smallest expenses such as a drink from the gas station to major purchases such as airline tickets or hotel rooms.
  • Be consistent: I repeated this process for 5 months to establish a credit history of regular use and always paying on time.

What My Improved Credit Score Allowed Me To Do

In August of 2011, I had to purchase a car so I could switch jobs.

When I filled out the credit application to see if I qualified for lower financing rates, my credit score came back as 731.

In other words, I raised my credit score from 621 to 731 in just five months!

This is a very big deal because, at 621, I would have been denied a loan for the car, or would have had an interest rate that exceeded 9% on the auto loan.

Since I chose to get a secured credit card, I was able to take the car loan on my own and qualify for the low rate of 3.99% financing.

The difference in the loan between the two interest rates would be $750 over the life of the loan, far surpassing the card’s annual fee, and the opportunity cost of my secured credit card holding my $1,100 for five months.

Why You Should Let Your Kids Get a Secured Credit Card

To all of the parents out there who worry about letting their college kid apply for a credit card, I can tell you it worked for me in five months and will change my financial future for many years to come.

Secured credit cards offer a foolproof way to raise your credit score when it is not possible through a regular bank credit card.

It’s a safe way to earn credit if you do not trust your kid to spend responsibly.

The worst that can happen with a secured card is that you cannot pay your bill, your company closes out the account, and they pay off your credit with the money you already have on deposit.

My secured card worked perfectly for me and I have now been accepted for a credit card with a major bank.

How to use a secured credit card to build credit

Do secured credit cards build credit? Yes, depending on how you use them. If you want to know how to build credit with a secured card, you’re going to need to understand the fundamentals of building good credit: making on-time payments, keeping your balances low and paying off your debts.

Building credit with a secured credit card is all about practicing those three habits. Use your secured card to make small everyday purchases and pay your statement balance in full every month. Avoid maxing out your credit card, and try to pay down any debts you had before you took out your secured card. The more work you put into actively building your credit, the faster you’ll achieve a good credit score.

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Can I get my security deposit back?

Many issuers only allow you to get your security deposit back when you close your account. And you’ll likely only be eligible for a full deposit refund if your account is completely paid off. If you default on your account, the credit card company may use your security deposit to pay off the balance.

But a few issuers have programs that allow you to “graduate” from a secured card to an unsecured card — returning your original security deposit in the process. If this happens, it’s generally after a period of demonstrating an ability to pay your bills on time and in full.

How Can I Get a Secured Credit Card?

The process for obtaining a secured credit card varies, so you’ll want to contact your financial institution to ask about their process. To obtain a secured credit card through Navy Federal, the process is simple. First, open a qualifying Navy Federal savings account if you haven’t done so already. Then, make a deposit of at least $200 into your savings account. Finally, submit your application for a secured credit card. Once approved, you’ll be issued a card with a credit limit equal to your deposit.

More good news—with Navy Federal’s nRewards® Secured credit card, you’ll enjoy a low interest rate and no annual, balance transfer or foreign transaction fees. You’ll even earn interest on your initial security deposit. Plus, Navy Federal’s secured credit card goes the extra mile: for every dollar you spend using the card, you’ll earn one rewards point that you can redeem later for cash back, gift cards or merchandise. Most importantly, Navy Federal reports all major activity to the credit bureaus, allowing you to build your credit history.

How to Pick a Secured Credit Card

  • Strive to avoid annual fees. While some secured credit cards charge an annual fee, we suggest looking at a secured card that doesn’t charge any fees first, like most of the cards listed above. Any upfront fees you have to pay will eat away at your initial credit limit bank deposit and force you to start your credit building journey with less money on your credit line.
  • Check minimum deposit amounts. Also check for minimum deposit amounts since some cards let you get started with a smaller collateral deposit upfront. A small upfront deposit could be important if you don’t have much spare cash around.
  • Make sure any card you’re considering reports to the three credit bureaus. The value in obtaining a secured credit card should be building credit, which is why making sure your card reports your credit movements to the three credit bureau agencies is so important. Every card on this list reports your payments and balances to the credit bureaus, so make sure to start your search with cards we’ve profiled.
  • Check for fees and read the fine print. Also make sure to check for fees and especially hidden fees in the fine print. Some secured credit cards charge an application fee and an annual fee, and many charge a monthly maintenance fee. The cards on this list are free of hidden fees, which is why we chose them.

Potential Benefits of Secured Credit Cards

There are plenty of advantages to using secured cards: A secured card can give you experience using a credit card, help you improve your credit profile and help you work toward a card with better rewards or a higher credit limit. 

It may help to think of a secured card like on-the-job training you can use to move on to bigger and better opportunities. 

Use a Secured Card to Build Credit

If you’re looking to build or rebuild your credit, you can use a secured card to help yourself build a successful track record. That means doing things like paying at least the minimum payment on time each month and using your card responsibly.

Keep in mind that missed or late payments could harm your credit. And so could exceeding your credit limit.

Another fact to consider: Some issuers may not report the status of secured cards. If better credit is your goal, look for a secured card that reports to at least one of the three major credit bureaus: Experian®, Equifax® and TransUnion®.

Secured Cards Can Help You Graduate to Traditional, Unsecured Cards

There’s no single right time to move from a secured card to an unsecured card. When and why you decide to apply for a traditional credit card will depend on your situation and goals. 

But some credit card companies may allow you to move seamlessly from a secured card to a traditional card without closing your original line of credit. The process may even involve returning your deposit.

Check with your credit card company to understand what’s possible and how your account will be treated if you transition to a traditional card. And be sure to understand how closing your secured card account could affect your credit.

Is a Secured Credit Card Good?

Secured credit cards are an expensive way to access credit, but they can be very useful for people looking to rebuild their credit score.

There are other a number of costs involved with secured cards that make them an expensive way to borrow. Secured cards’ annual percentage rates (APRs) tend to be on the high side—often more than 20%—but are currently in line with the national average of just under 20% as of November 2021. But if you are a secured-card candidate, then your credit score is presumably not the strongest, and you wouldn’t qualify for the best rates anyway. So 20% or more may not be that much more expensive than other forms of credit available to you.

On the other hand, secured credit cards can be great for borrowers looking to improve their credit score. Secured credit cards are aimed at people with a poor credit history or very little credit history—those who would have trouble qualifying for a regular credit card. The deposit that they put up compensates the card company for the extra risk associated with extending credit to them.

How to Build Credit with a Secured Credit Card

Obtaining a secured credit card and then using it responsibly for several months or a couple of years can be a recommended way to establish or improve your credit history and/or boost your credit score. Unlike a prepaid credit card, which functions more like a debit card, a secured credit card will send your account history to the credit bureaus to be included in your credit report. This means that using a secured card can gradually improve your credit score.

In fact, if you maintain a positive payment history, secured-card lenders may increase your credit limit over time or even offer to upgrade you to an unsecured card (in which case, you can get your deposit back). Maintaining that positive history usually means paying off balances in full each month—and, of course, paying on time. If you miss payments, lenders will report delinquencies to the credit reporting agencies, which won’t do your credit score any good.

Be warned, however, that improving your credit score in this way can do more harm than good if you miss payments. While consumers typically obtain secured credit cards to improve their credit, their credit score can be damaged if any delinquencies arise. 

6 The minimum number of months that using a secured credit card can improve a credit score

How can I change a secured credit card to an unsecured card?

If you regularly meet your payments on your secured credit card, your credit score should gradually improve. You can check your credit score online at regular intervals so you know when you have a good chance of being approved for a regular credit card. Sometimes, your card issuer will do this for you and automatically convert your secured card to an unsecured card (and typically increase your credit limit as well).

The amount of time this takes to happen varies greatly, but if your credit score is poor, then you should expect to make regular payments for a few months before you are approved for an unsecured credit card.

Pros Explained

Secured credit cards can be a good option for building or rebuilding your credit. Five benefits stand out for consumers with blemished credit or no credit at all.

  • You can often get approved for a secured credit card when you can’t get approved for a traditional credit card. Paying the security deposit shifts the credit risk away from the credit card issuer.
  • They typically report to credit bureaus. Unlike a prepaid credit card which functions more like a debit card, a secured credit card will send your account history to the credit bureaus to be included in your credit report.
  • A secured credit card can help you establish or re-establish your credit. Since payments are included in your credit report, paying on time and managing your balance will help improve your credit score. After raising your credit score, you may be able to qualify for a regular credit card.
  • Your security deposit is used only if you default on your payment. Unless your defaulted balance is more than your deposit, you won’t get sent to collections for defaulting on your payments. Though the card issuer will keep your deposit, you don’t have to worry about debt collectors hounding you for missed payments on the card. The late payments still will hurt your credit score, however.
  • You can earn rewards on purchases with some cards, such as Discover and Navy Federal’s secured cards.

How do secured credit cards help you build credit?

Card issuers report your payment history and credit utilization to the credit bureaus. Paying on time and keeping a low balance on your card can improve your credit score. The key to using a secured credit card to build credit is to use it responsibly.

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