5 Steps to Rebuild Your Credit Score Using a Secured Credit Card

Financial emergencies can knock on your door at any time, without warning. In this situation, you may need quick access to funds, which can only be possible with a credit card or a loan.

But if you have a credit score lower than 500, you may find it harder to qualify for a credit card, a personal loan or other loans. Even if you somehow qualify for it, you may be charged high interest rates or get less favorable terms.

But the good news is you can still get a secured credit card with a low or no credit score, and it will also give you a chance to enhance your financial profile and upgrade to other credit cards with responsible use.

If you’re wondering how to use a secured credit card to improve your credit history or rebuild your credit profile, read this blog to learn how. In this blog, we have mentioned the top 5 steps to rebuild your credit score using a secured credit card.

What Is a Secured Credit Card?

Before we get into how you can increase your credit score with credit-rebuilding cards, let’s understand what secured credit cards are.

A secured credit card is not much different from other credit cards. It works in the same way, but unlike them, you need to deposit a certain amount of cash as collateral before getting one. This security deposit will later act as your credit limit.

For example, let's assume you apply for a secured card that requires a $500 deposit. If the credit card provider sets your credit limit at $500, you can generally make purchases up to that limit. The deposit is not the same as your monthly payment. You still have to pay your credit card bill each month.

The main reason secured cards can be easier to get is that the deposit reduces the card provider’s risk. Many credit card providers may offer a secured card to people who have a low FICO score or who have difficulty qualifying for traditional credit cards for other reasons.

This security deposit may be returned to you when you close the account in good standing or when the credit card provider upgrades your secured credit card to an unsecured one. But the exact process of this upgrade depends on the card provider.

More importantly, a secured credit card can give you an opportunity to establish positive payment history. If the issuer reports your account activity to the credit bureaus, responsible use may help you build or rebuild your credit over time.

Can a Secured Credit Card Really Rebuild Your Credit?

While getting a secured credit card, many people wonder: can a secured credit card really rebuild their credit score? If you are wondering about the same, then let me tell you: yes, it can help you improve your credit profile. But no credit card can guarantee that your credit score will increase by a specific number of points.

Your credit score is based on information in your credit reports. When a card provider reports your account activity, things such as your payment history and credit utilization can become part of that information. You need to make timely payments, and your credit utilization also matters because it shows how much of your available revolving credit you are using.

For example: if your card has a $500 limit and your balance is $400, you are using 80% of your available credit. That is a much higher utilization rate than using $50 of the same $500 limit.

The CFPB recommends paying bills on time and avoiding getting too close to your credit limit when rebuilding credit.

How to Use a Secured Credit Card Responsibly

Randomly choosing a credit card can be a problem; you need to choose it carefully. Choose a card that fits your financial situation and needs. Don’t choose a card simply because you are likely to qualify.

Every secured credit card comes with different credit limits, terms and conditions that you need to check carefully before getting the credit card. The following are the terms that you need to check:

Step 1: Choose a Secured Credit Card Carefully

You cannot choose a card randomly just because you are qualified for it; you need to choose it carefully. Make sure you choose a card that fits your financial situation and needs.

Every secured credit card comes with different credit limits, terms and conditions that you need to check carefully before getting the credit card. The following are the terms that you need to check:

Check Whether the Provider Reports to the Credit Bureaus

This is the most important factor that you should definitely check before getting a credit-rebuilding credit card. Before applying for a credit card, ask your provider or find out whether it reports your payments and account activity to the main credit bureaus: Experian, Equifax and TransUnion. They should report your account activity to all of them or at least one of them.

Compare Fees

Look at the annual fee and any other charges associated with the card. Some secured cards may have additional fees that can make them expensive to maintain. Don’t assume that every secured card costs the same. Before getting a card, check all the terms carefully to know what you will be charged before opening the account.

Look at the APR

The annual percentage rate tells you the yearly cost of carrying a balance. You may not pay interest if you pay your statement balance in full each month, based on the card’s terms. But it is still important to know the APR before applying. If you carry a balance from one month to the next, interest charges can increase the amount you owe.

Check the Deposit Requirement

The credit deposit limit may vary by credit card. Not all credit cards have a fixed deposit amount; some secured credit cards may have variable deposit limits. Choose the credit card whose deposit amount you can afford without straining your monthly budget.

Check If You Can Upgrade Later

If you are using your secured cards responsibly, many credit card providers may allow you to upgrade them to unsecured cards. Others may review your account automatically or allow you to request an upgrade. You get back your security deposit with an upgrade.

Step 2: Make an Affordable Deposit

Make sure the security deposit is what you can afford. For many credit-building credit cards, the security deposit is your starting credit limit. For example, a $300 deposit may give you a $300 credit limit, although the exact arrangement varies by card provider.

It is important to understand that the deposit does not mean you are spending your own money directly. If you deposit $500 and receive a $500 credit limit, you are still borrowing when you use the card. If you spend $100, you owe the card provider $100. You cannot simply treat the $500 deposit as a payment toward your monthly bill. You will still need to make at least the required payment by the due date. Make sure you understand these terms:

Don’t Put Too Much Money into the Deposit

Because a larger deposit gives you a higher credit limit, you may be tempted to deposit more. Make sure you only deposit money that you can comfortably set aside.

Remember the Deposit Is Not a Guarantee of Approval

A credit card for credit building generally has a security deposit, but you may still need to meet the provider’s application requirements. The deposit reduces the provider’s risk, but it does not mean everyone will automatically be approved. Review the credit card provider’s eligibility requirements before applying.

Step 3: Use the Card for Planned Purchases

Once you receive your secured credit card, don’t feel like you need to use the entire credit limit. In fact, using the card for small purchases can make it easier to control your balance. For example, you could use your secured card for a small recurring expense, such as a streaming subscription, phone bill, or regular household purchase, as long as the purchase fits your budget.

Your Credit Limit Is Not Your Extra Income

Your card’s credit limit is not the amount you can spend. You should not spend it like regular money that you spend on daily expenses. If your secured card has a $500 limit, that does not mean you should spend the whole $500 every month.

Only charge purchases that you already have room for in your budget. Ideally, you should know how you will pay for the purchase before putting it on the card. For example, suppose you have $200 available in your monthly budget for a purchase, and your secured card has a $500 limit. Spending $150 may be manageable if you can pay the bill when it arrives. But spending $450 simply because you have a $500 credit limit could make repayment much harder.

Your Balance Should Be Manageable

Credit utilization is the amount of revolving credit you are using compared with your available credit. For example, suppose your credit limit is $500, your balance is $100, and your credit utilization is 20%. If the balance rises to $400, your utilization becomes 80%.

The CFPB recommends avoiding getting too close to your credit limit. Your spending should always be below 30%, and if it is lower than this, it will be better for you.

Step 4: Timely Bill Payment

On-time bill payment is one of the most important things to take care of when you plan to use a secured credit card to build credit. A secured credit card only helps to improve your FICO score if you manage the account responsibly.

If you repeatedly fail to repay on time or do not repay the bill for several months, it may negatively affect your credit score. Your card statement will show a payment due date and a minimum amount due. Make sure at least the required payment reaches the card provider by the due date.

Set Up Automatic Payments

Anyone can forget their payment due dates, and it is very common. To avoid this, you should set up automatic payments through your card provider or bank. You can often choose to pay at least the minimum amount due automatically. To make sure the payment goes through and that you have enough money in your account, you should regularly check your bank account.

Don’t Wait Until the Last Minute

Make sure you understand when your payment needs to reach the issuer. If you pay by mail, allow enough time for the payment to arrive. Online payments may be more convenient, but you should still check your account after making a payment to confirm that it was processed.

Carrying A Balance Is Unnecessary

If you think that carrying a balance from month to month is necessary for credit building, then you are daydreaming. Stop paying high interest just to build credit. It will just empty your pockets and will not increase your FICO score. But if you use your card responsibly and repay your bills on time, you may improve your credit history and avoid unnecessary interest charges.

Step 5: Monitor Your Credit History

Your work doesn’t stop by just getting a secured credit card. You should also keep an eye on your credit reports and continue practicing good financial habits. Credit movement usually takes time. There is no guaranteed number of weeks or months in which your score will increase by a certain amount. You need to wait and do the needful. The time it takes to build credit depends on your starting point. If your starting score is 500, you may take less time than a person with a FICO score of 350.

Common Mistakes to Avoid with a Secured Credit Card

A secured credit card is very useful for repairing your credit history, but if you use it incorrectly, it may damage your credit profile even more. People often make these common mistakes that should be avoided while using a credit-rebuilding credit card.

Maxing Out the Card

People often max out their credit cards, which is one of the biggest mistakes while using this card. When you use most or all of your available credit, it increases your credit utilization, which may hurt your credit score. It can also make the balance harder to pay.

Late Payment or No Payment

Sometimes people miss paying their bills on time or pay them after the due date, which negatively impacts their credit history. You should keep track of your payment due dates if you are planning to build your credit profile from scratch or trying to rebuild a good credit profile.

Applying for Too Many Accounts

Opening several new credit accounts in a short period of time will not help you increase your credit score overnight; instead, it can make managing your finances harder and may affect your credit score. The CFPB recommends avoiding applying for too much credit in a short period.

Ignoring Annual Fees

This is another common mistake people make while getting a secured credit card. Don’t overlook annual fees and other charges. Read all the card’s terms and conditions carefully before applying so you know what the account may cost and how much you need to repay.

Higher Limit Does Not Mean More Spending

Increasing your credit limit with the credit card provider does not mean you should empty your pockets to match it. This means you do not need to spend more when increasing your credit limit. A higher limit can give you more flexibility, but responsible spending should remain the priority.

Closing the Card Too Quickly

You may qualify for an unsecured card after using the secured one for a few months. But remember, don’t automatically close your secured card without considering how closing the account could affect your credit profile. Closing a card can reduce your available credit and may affect your credit utilization.

Check whether the issuer can upgrade your existing card or return your deposit before deciding what to do.

When Should You Upgrade Your Secured Credit Card

There is no universal time for switching from a secured credit card to an unsecured one. You may do it after a few months of responsible use, or it may take years.

It also depends on the provider; some providers may review secured card accounts and upgrade eligible customers who have shown responsible payment behavior in the past, while others may ask you to apply for a separate account for unsecured cards.

Conclusion

If your credit score is below 450 and you are trying to get a credit card, then a secured credit card can be your savior. This type of credit card can be a useful starting point to rebuild your damaged credit profile or to build your credit from scratch.

But if you think that getting the card is enough for rebuilding your credit, then you are mistaken. This card itself isn't what rebuilds your credit; how you use it is.

Choose a card whose terms are affordable for you, and make sure the security deposit doesn’t drain your pockets. Plan your purchases beforehand and use the card for small purchases. Maintain a manageable balance and pay the bills on time. Do not miss any due dates each month.

Also, you need to be patient and persistent. Remember, your credit score will not skyrocket overnight. It is a steady process that takes time.