Both traditional credit cards and secured credit cards extend a line of credit based on your income, creditworthiness, and other factors. But unlike a regular credit card, a secured credit card typically requires a security deposit used as collateral for your credit line.
Secured cards can be one option for people looking to build a credit history. The security deposit covers the debt incurred in the event of non-payment to the credit card company, so they’re often willing to issue a card to applicants who might otherwise be denied for an unsecured credit card. 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.
Read on to learn how to use a secured credit card, including using it as a credit builder, establishing healthy credit while avoiding common mistakes, and how with responsible use, you may be able to graduate from a secured card to an unsecured credit card.
How to Use a Secured Credit Card
Key points about: using secured credit cards
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Typically, a secured credit card requires a refundable security deposit that’s used as collateral and generally represents the card’s credit limit.
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A secured credit card is one way to build a credit history.
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Your credit card issuer will likely report your secured credit card activity to credit bureaus, which may influence your credit score.
Understand how credit works
Credit history and credit scores in top shape could help 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. That can benefit you because you may get more favorable interest rates and higher credit or loan limits. A secured credit card may help you on this path.
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With no harm to your credit score1
Credit reports typically come from three major bureaus: Experian, Equifax, and TransUnion. Under federal law, according to the Federal Trade Commission, you’re entitled to a free copy of your report from each of these bureaus. You can also get free copies of your credit report if you’re denied credit or insurance as a result of what’s reported. As an added benefit, Discover® offers cardmembers the ability to get their FICO® Score for free.2
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. Many hard inquiries could 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. 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 responsibly handling debt and bills in order to prove you’re creditworthiness 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 as collateral 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.
Typically speaking, the credit limit on a secured card will be smaller compared to a traditional credit card, which can be a benefit for anybody learning how to manage credit responsibly, since it can help prevent you from accumulating too much credit card debt.
The Discover it® Secured Credit Card requires a refundable security deposit of at least $2003, which will equal your credit line. So, once approved and 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 use4 of your Discover it® Secured Credit Card. Using your Discover secured credit card will build a credit history with the three major credit bureaus, unlike prepaid and debit cards, which generally don’t report to the three major credit bureaus.
Additionally, some secured credit cards offer the benefit of cash back rewards. For example, with a secured credit card from Discover, you’ll earn 2% Cashback Bonus® at Gas Stations and Restaurants on up to $1,000 in combined purchases each quarter, automatically. Plus earn unlimited 1% cash back on all other purchases.5 You also get Cashback Match: We’ll automatically match all the cash back you’ve earned at the end of your first year. There is no limit to how much we’ll match.6
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 steps for using a secured credit card as a credit builder 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. Your payment history is one of the most important factors in calculating your credit score.
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’re able to properly manage your money, and reducing your credit utilization ratio–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’re 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 responsibly can help you graduate to an unsecured card
A secured credit card can be one way to show a credit card issuer you’re ready to handle credit responsibly. With that in mind, some card issuers may offer cardmembers a path to an unsecured card.
Did you know?
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.7
Once you graduate, consider keeping up your financial health by continuing to use your credit card responsibly. 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.
Make the most of your tax refund. Build your credit history.*
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- There is no hard inquiry to your credit report to check if you’re pre-approved. If you’re pre-approved, and you move forward with submitting an application for the credit card, it will result in a hard inquiry which may impact your credit score. Receiving a pre-approval offer does not guarantee approval. Applicants applying without a social security number are not eligible to receive pre-approval offers. Card applicants cannot be pre-approved for the NHL Discover Card.
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FICO® Credit Score Terms: FICO is a registered trademark of Fair Isaac Corporation in the United States and other countries.
Discover Financial Services and Fair Isaac are not credit repair organizations as defined under federal or state law, including the Credit Repair Organizations Act. Discover Financial Services and Fair Isaac do not provide “credit repair” services or assistance regarding “rebuilding” or “improving” your credit record, credit history or credit rating.
- Secured Card Deposit Range: If approved, you must make a minimum security deposit of $200 (or more, in increments of $100 up to $2,500), which will equal your requested credit limit. Discover will determine your maximum credit limit by your income and ability to pay.
- Build/Rebuild Credit History (Secured Card): Discover reports your credit history to the three major credit bureaus so it can help build/rebuild your credit if used responsibly. Late payments, delinquencies or other derogatory activity with your credit card accounts and loans may adversely impact your ability to build/rebuild credit.
- 2% Chrome Gas and Restaurants: You earn a full 2% Cashback Bonus® on your first $1000 in combined purchases at Gas Stations (stand-alone), and Restaurants each calendar quarter. Calendar quarters begin January 1, April 1, July 1, and October 1. Purchases at Gas Stations and Restaurants over the quarterly cap, and all other purchases, earn 1% cash back. Gas Station purchases include those made at merchants classified as places that sell automotive gasoline that can be bought at the pump or inside the station, and some public electric vehicle charging stations. Gas Stations affiliated with supermarkets, supercenters, and wholesale clubs may not be eligible. Restaurant purchases include those made at merchants classified as full-service restaurants, cafes, cafeterias, fast-food locations, and restaurant delivery services. Purchases must be made with merchants in the U.S. To qualify for 2%, the purchase transaction date must be before or on the last day of the offer or promotion. For online purchases, the transaction date from the merchant may be the date when the item ships. Rewards are added to your account within two billing periods. Even if a purchase appears to fit in a 2% category, the merchant may not have a merchant category code (MCC) in that category. Merchants and payment processors are assigned an MCC based on their typical products and services. Discover Card does not assign MCCs to merchants. Certain third-party payment accounts and digital wallet transactions may not earn 2% if the technology does not provide sufficient transaction details or a qualifying MCC. Learn more at Discover.com/digitalwallets. See Cashback Bonus Program Terms and Conditions for more information.
- Cashback Match: We’ll match all the cash back rewards you’ve earned on your credit card from the day your new account is approved through your first 12 consecutive billing periods or 365 days, whichever is longer, and add it to your rewards account within two billing periods. You’ve earned cash back rewards only when they’re processed, which may be after the transaction date. We will not match: rewards that are processed after your match period ends; statement credits; rewards transfers from Discover checking or other deposit accounts; or rewards for accounts that are closed. This promotional offer may not be available in the future and is exclusively for new cardmembers. No purchase minimums.
- Getting your deposit back: Monthly reviews start your seventh month as a customer. We will refund your security deposit if you have made all payments on time for the last six consecutive billing cycles on all your Discover accounts including any loans, and you've remained in “good status” on all credit accounts you are responsible for whether they are Discover accounts or not. “Good status” means: (1) your credit report shows no delinquencies, charge-offs, repossessions, or bankruptcies for the six months prior to our review; and (2) your Discover Secured Card is not in a prohibited status at the time of our review, including, but not limited to: closed, revoked, suspended, subject to tax levy, garnishment, deceased, lost/stolen, or fraud. Monthly reviews may be delayed if you change your payment due date. We typically process your refund in 2-3 business days based on your delivery preference. If you close your account and pay in full, we’ll return your deposit within two billing cycles plus ten days
- *Discover reports your credit history to the three major credit bureaus so it can help build your credit if used responsibly. Late payments, delinquencies or other derogatory activity with your credit card accounts and loans may adversely impact your ability to build credit.
- **Minimum Security Deposit: If approved, you must make a minimum security deposit of $200 (or more, in increments of $100 up to $2,500), which will equal your requested credit limit. Discover will determine your maximum credit limit by your income and ability to pay
- Legal Disclaimer: This site is for educational purposes and is not a substitute for professional advice. The material on this site is not intended to provide legal, investment, or financial advice and does not indicate the availability of any Discover product or service. It does not guarantee that Discover offers or endorses a product or service. For specific advice about your unique circumstances, you may wish to consult a qualified professional.