Using a secured card to build credit history

If you’ve been looking to get your first credit card, chances are you’ve come across something called a secured credit card. You might have even heard you can use a secured credit card to build credit. First, congratulations on doing that research! Card offers vary a lot in terms of interest rates, annual fees, and other pesky rules, so it definitely pays to shop around.

That said, you may be wondering what’s the difference between a secured vs. an unsecured credit card. No worries, we’ll explain it all—with key tips on what to look for in a secured credit card, and how it could help you build credit. Finally, we’ll tip you off to one of the biggest mistakes people sometimes make with a secured credit card.

But first, you need to know the basics of credit scores.

What your credit score means

A good credit score is super important, since without one it’ll be harder to buy a car or house, or even rent an apartment. And in many states, your car insurance rate can go up if you have a bad credit score.

Your credit score is calculated by algorithms informed by FICO and used by the three credit bureaus — Equifax, Experian and TransUnion. It’s a snapshot of your credit history at a certain point in time, and it can change frequently based on the activity reported to your account. 

Let Spruce help you keep tabs on your credit score. With the Spruce mobile banking app, you can see your credit score and easily learn what types of activity affects it.

A common way to build credit is by opening a traditional credit card account and making payments on time every month. The catch? Without a good credit score, it’s hard to get a conventional unsecured credit card with a low APR and not a lot of fees. That’s where secured credit cards come in — and they can be game changers.

What is a secured credit card?

A secured credit card requires you to make a cash deposit with the card issuer which is used as the collateral for the account and thus becomes the “security” in the instance the consumer does not pay back the amount borrowed. The amount of that deposit is in many instances, essentially equal to the credit limit you can charge on the card. Deposit $250? Now you can charge up to $250. Take note that these limits and security amounts are set by the issuer of the credit card (lender) and can vary.

Your credit rating can often play a big role in how the lender decides the credit limit and how much security they’ll require. For that reason, issuers of secured credit cards also do a credit check — although with these cards even people with low or no scores usually qualify, since the credit is secured by the funds on deposit. Most cards require a minimum deposit of $200-$300, and most of the major card issuers offer them. But again, those amounts are set by the issuer and can vary depending on their underwriting and risk criteria.

Some people may think of this card type as a credit builder account — something they use while they demonstrate good habits such as making on time payments.

The difference between a secured vs. unsecured card

Secured credit cards are different from most credit cards. With most cards, you can charge to your heart’s content (up to the card’s limit, which varies depending on the lender’s underwriting criteria but typically includes things like your income, credit score and other factors). The credit card issuer has extended credit to you based on your credit history. Depending on your credit history, the lender may compensate for risk by charging a higher interest rate.

You might think secured credit cards give you a break on those interest rates. After all, you can only charge as much as you’ve handed over to the issuer. But that’s not always the case. Most secured cards actually charge higher interest rates than unsecured cards.

That’s because people with limited or bad credit are still generally considered to be in a higher credit risk category, even though they’ve secured the credit with a deposit. The issuer might also charge annual fees (as they do for many unsecured cards) plus other fees — like a setup fee, a monthly maintenance fee, a high late payment fee, and a fee to choose an aisle seat. Okay, not the last one, but you get the idea.

Bottom line: Shop around, read the fine print and compare products, so you know exactly what you’re signing up for. Some options might not be the best secured credit card for you.

How to build credit with a secured credit card

The issuer of a secured credit card will likely report your payments to the credit bureaus, which if made on time and for at least the minimum amount due, can potentially boost your credit score. Depending on the issuer, after six to 18 months of on-time payments to a secured card, you may be eligible to upgrade to an unsecured card.

Making that upgrade is usually a good idea because, as we mentioned above, most secured cards carry higher fees and interest. That said, you might decide you like the enforced budgeting of a secured card, which won’t let you buy that $2,000 designer jacket even in a fit of retail therapy.

Note that you don’t need to get an unsecured card from the same company that gave you the secured card — you’re free to shop around with other card issuers.

Check out this advice on other ways to build credit without a credit card.

So, what could go wrong? Read on…

The biggest mistake people make with a secured credit card is assuming it works like a debit card. If that were the case, the issuer would simply withdraw whatever you’ve charged out of your initial deposit.

But that’s not how it works.

With a secured card, you’ll get a bill every month showing your charges, and a minimum payment that’s due about three weeks later — just like you would with an unsecured card. If you make only the minimum payment, you’ll start racking up interest on the part you didn’t pay back — again, just like an unsecured card.

Key point: It’s up to you to make those monthly payments! The issuer only draws from your deposit if you default on the account which happens when you don’t make the payments.

So, what happens if you miss a payment? Just like a regular card, your credit score will get dinged. To avoid that fate, keep track of due dates and make your payments on time like the money pro you’re becoming.

Keep tabs on your credit score with Spruce

Once you understand how to use a secured credit card to build credit, monitor your credit report regularly (available for free at and dispute any errors. With the Spruce mobile banking app, you can easily check your FICO credit score whenever you want.

Spruce fintech platform is built by H&R Block, which is not a bank. Bank products by Pathward®, N.A., Member FDIC.

Plus, Spruce offers other features, such as overdraft protection and cash back rewards at select retailers that can help you on your way to getting better with money day by day.

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This information provided for general educational purposes only. It is not intended as specific financial planning advice as everyone’s financial situation is different.

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