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How to Use a Secured Credit Card

Last Updated: March 1, 2022
7 min read

Unlike traditional credit cards, a secured credit card requires a security deposit held as collateral against the charges you make. Both traditional credit cards and secured credit cards extend a line of credit based on your income, creditworthiness and other factors.

Secured credit cards are popular with people looking to build a credit history. The deposit is designed to reduce the risk of non-payment to the credit card company, so they’re often willing to issue a card to applicants who might otherwise be denied. Then, just as they would for a traditional credit card, the issuer typically reports your activity to the credit bureaus, giving you the chance to build a credit history.

With responsible use, you might be able to parlay your secured credit card into an unsecured credit card. The credit history you build along the way can open the door to previously unattainable lines of credit, like a car loan or a mortgage.

Read on to learn how to use a secured credit card, including tips for building credit with a secured credit card and establishing healthy credit while avoiding common mistakes.

Understand how credit works

Knowing how the credit system works may help keep you motivated, so let’s be clear: credit history and credit scores in top shape could save you thousands of dollars over the course of your lifetime. The better your credit, the less of a risk you carry for lenders and card issuers. You may get more favorable interest rates and higher credit or loan limits. A secured credit card may help you on this path.

Credit reports come from three major bureaus: Experian, Equifax and TransUnion. Under federal law, you are entitled to a free copy of your report from each of these bureaus; during the COVID pandemic it’s available weekly. You can also get free copies if you are denied credit or insurance as a result of what’s reported. Discover® offers cardmembers the ability to get their FICO® Score for free1.

Credit reports list credit accounts you’ve opened and closed, their balances, and whether they’re in good standing. Reports may include negative information, such as accounts that haven’t been paid and accounts that have been sold to collection agencies. Credit reports also include “hard inquiries,” which occur when you apply for credit. A large number of hard inquiries can impact your credit score.

Your credit score is a three-digit number that is based on your credit history, and it helps creditors analyze the risks of lending you money. Typically, FICO® Credit Scores can range from 300-850. Utility bills, credit card applications, loan balances — all of these, and more, play into this history.

A perfect FICO® Credit Score of 850 is extremely rare and perhaps fleeting (the moment someone with an 850 score applies for credit, that score may drop because of an inquiry). The good news is, you don’t need to be perfect to be excellent. In fact, any score above 800 is considered exceptional. And any score above 700 is generally considered good.

So, how do you achieve a good score? You don’t want to carry too much debt, but at the same time, you need to have a track record of handling debt and bills smartly in order to prove you’re a safe bet for lenders. A secured credit card can help you purchase necessities now while building that credit history.

You can use a secured credit card to build a credit history

Unlike a typical credit card, a secured credit card requires you to provide a security deposit up front before you can borrow any money. Your credit limit will usually equal the amount of your security deposit, up to the amount that can be approved.

For example, the Discover it® Secured credit card lets you provide a refundable security deposit of as little as $200 or as much as $2,500 if you’re approved for an account. 2 Your credit limit on the card is equal to your security deposit, up to the amount it can approve. So, upon approval for a credit line of $1000, if you’ve put down a security deposit of $1,000, you can spend up to $1,000 with your new secured credit card. You can then build your credit with responsible use of your Discover it Secured credit card.3 Using your Discover secured credit card will also build a credit history with the three major credit bureaus. Generally, prepaid and debit cards can’t do that.

Additionally, some secured credit cards offer cash back rewards. For example, with a secured credit card from Discover, you’ll get 2 percent cash back at gas stations and restaurants on up to $1,000 in combined purchases each quarter,4 and 1 percent unlimited cash back on all other purchases. You also get Cashback Match: Discover matches all the cash back you’ve earned at the end of your first year of having the card5.

Steps to building credit with a secured credit card

A secured credit card can put you on the path toward building a credit history, but getting there requires using the card wisely. Here are five steps for using a secured credit card in responsible ways.

Make small purchases you can pay off each month

The point of using a secured credit card is to show your ability to responsibly charge and then pay off your balance. To do this, make a few purchases each month and pay your bill in full and on time. By not carrying a balance, you not only avoid paying interest on purchases, but are using a time-tested strategy for building credit.

Pay on time, and more than the minimum

While making your minimum payment on time is one essential element to a healthy credit score, upping that payment each month has added benefits. Among them: helping to pay off more of your balance, which can show that you are able to properly manage your money, and reducing your credit utilization ratio, or the amount you owe compared to your credit limit. Both are factors that affect your credit score.

Set payment alerts for your secured credit card

Even the most organized person misses a payment now and then. But when you are trying to build credit, that’s one time too many. Avoid this scenario with payment alerts that remind you of your bill’s upcoming due date. You may choose to set up a “Payment Due” text alert with your issuer, or manually set a monthly “alarm” that notifies you a week before your bill is due.

Enroll your secured credit card in auto-pay

Perhaps the easiest way to avoid late payments is to enroll in auto-pay, which allows your issuer to automatically deduct the monthly balance from your bank account so you don’t have to keep track of bills.

Using your secured credit card to learn financial habits that work best

Learning to manage your credit card use based on your budget is key to making sure you can be one of the many Americans that does not carry a balance.

A secured credit card can also serve as a valuable training ground to learn which money management tools fit your financial personality. Prefer not to deal with paper statements, mail or even a physical wallet? Electronic account statements, online banking and mobile wallet apps may help you keep your financial life in order. Afraid that you’ll miss an electronic statement in a crowded email inbox, or don’t have consistent access to a computer or a secure WiFi connection? Then you may prefer paper statements, and a more traditional budgeting and payment system. When you understand what financial systems work for your life, you can better manage them.

Using your secured credit card properly lets you graduate to an unsecured card

With the Discover it Secured credit card, you can get your deposit back after 6 consecutive on-time payments and maintaining good status on all your credit accounts.6 Once you do, consider keeping up your financial health by moving the funds you originally used to secure the credit line on your secured credit card into an interest-bearing savings account that you contribute money to from each paycheck (even if you can only afford small amounts). You’ve worked hard to build a positive credit history, and should celebrate what you’ve achieved while continuing to plan for your financial future.

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