How does a secured credit card work compared to a credit card? A secured card uses money you place in a security deposit account as collateral against charges you make. If you have no or poor credit, buying a house or a car, or applying for an apartment, might seem like a monumental task. A secured credit card, used responsibly, may help build your credit in several meaningful ways that can help you reach your financial goals.

By putting money up as security against your card, the credit card company sees you as less of a risk. With responsible use, you can parley your secured card into an unsecured credit card. Consider these tips for understanding how a secured credit card can help you build credit:

1. Understand Credit and Why It Matters

2. Understand Secured Credit Cards and How to Use Them

3. Smart Spending and Payments Help Build Credit

4. Develop Healthy Habits With Your Secured Card

5. Graduate From Your Secured Card

1. Understand Credit and Why It Matters

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 seem to lenders and card issuers. You may get more favorable interest rates and higher credit or loan limits. A secure credit card may help you on this path.

Credit reports come from three major agencies: Experian, Equifax and TransUnion. Under federal law, you are entitled to a free copy of your report from each of these bureaus every 12 months. You can also get free copies if you are denied credit or insurance as a result of what’s reported. Discover® offers both cardmembers and non-cardmembers the ability to get their FICO® Score free of charge.

The 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 may also include a section on “inquiries” or instances where you’ve authorized a creditor to look at your credit history. A large number of inquiries can be a red flag for creditors and becomes part of the information that goes into 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, 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 credit score of 850 is extremely rare and perhaps fleeting (the moment someone with an 850 score applies for credit, that score drops because of an inquiry). The good news is, you don’t need to be perfect to be excellent. In fact, any score above 720 is considered excellent, Nerdwallet notes. And any score above 700 is considered good.

So, how do you achieve a score of 700 or higher? Good credit builds over time. 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.

2. Understand Secured Credit Cards and How to Use Them

Unlike a typical credit card, which assigns you a credit limit based on your credit history and perceived ability to repay the amount you borrow, with a secured credit card, you’re required 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 open an account with a refundable security deposit of as little as $200 or as much as $2,500. Your credit limit on the card is equal to your security deposit, up to the amount it can approve. So, upon approval, if you’ve put down a security deposit of $1,000, you can spend up to $1,000 with your new secured credit card. It even offers cash back rewards. Discover will also match all the cash back you earn at the end of your first year as a new cardmember.

Maybe you want a car loan, or if you have a car loan, and wonder if you could somehow save money on the payments. With good credit, you might qualify for a lower-interest version, or refinance your current car loan at a lower interest rate. You may also want to build credit in order to qualify for a mortgage, if you’d like to buy a house or apartment.

A secured card may also help you save for a rainy day. For example, saving up for a security deposit for your secured credit card can be part of your overall emergency savings plans. If you are starting out with no credit history or limited credit, you may find that it feels surprisingly empowering to be able to save that first $200 or $500 to put toward your refundable deposit on a secured credit card.

Having an emergency fund can help you stay financially stable in the face of unexpected setbacks. At the same time, your secured credit card can help you maintain the financial discipline to manage your money smarter, and build up savings along the way.

Some secured credit cards offer cash back rewards. For example, with a secured credit card from Discover, you’ll get 2 percent cash back on up to $1,000 of spending at gas stations and restaurants each quarter, 1 percent unlimited cash back on all other purchases, and a full Cashback Match of all the cash back rewards you’ve earned during your first year of having the card.

Sorting through your secured credit card options requires effort, but it also teaches you to read, compare and understand the potential impact that credit card terms, interest rates and fees have on the cardholder. When you begin receiving more offers to apply for new credit, you’ll be better positioned to sort through the marketing messages and understand what terms you’re really being offered.

You might put this extra money toward your emergency savings fund, or add it to your savings for a down payment on a car or a home.The key rests with using your secure credit card responsibly, in ways that build your credit.

3. Smart Spending and Payments Help Build Credit

A secured credit card can support your credit history health, but to do so requires using such a card smartly. Here are five steps for using a secured card in ways that may help your credit score.

  • 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.
  • Make multiple payments. Making more than one monthly payment can help keep your balance continually low. Even if you pay in full each month, you can’t be sure when your credit card issuer will send your report to the three credit agencies, and a large balance reduces your overall credit, which can negatively affect your credit score. You may also choose to send a payment after a heftier-than-normal purchase.
  • Set payment alerts. 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” alert with your issuer, and be texted, or manually put together a monthly “alarm” that notifies you a week before your bill is due.
  • Enroll in auto-pay. Still concerned about making your payment on time? Perhaps the easiest plan 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.

4. Develop Healthy Habits With Your Secured Card

Just over half of the credit card owners surveyed by the Federal Reserve said they currently have outstanding credit card debt. Of those, 27 percent carried a balance for at least 12 months that they didn’t fully pay off. Learning to manage card use based on your budget is key to making sure you don’t join their ranks.

It may take some discipline to save the deposit required to open a secured credit card. As Psychology Today explains, this act of setting a goal, working toward and achieving it are critical steps in early habit formation; making saving part of your financial life is no different.

For example, a secured credit card can 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 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.

5. Graduate From Your Secured Card

Once you “graduate” to an unsecured credit card, consider moving the funds you originally used to secure the credit line on your secured credit card into an interest-bearing savings account. Contribute money to the account from each paycheck (even if you can only afford small amounts), to continually strengthen your savings habit.

Set a series of goals you want to reach, like building an emergency fund, saving money to afford a large purchase or to pay for an upcoming trip. Set larger goals to work toward at the same time, like building a retirement savings account balance or saving to make a down payment on a home. Check your balances regularly to measure the progress you’re making and to reinforce the habit of saving.

You may eventually own several unsecured credit cards, but when you’ve become accustomed to owning just one secured credit card, you may be better prepared to resist the lure of credit card offers that promise discounts at the point of sale, but won’t support your longer-term financial goals. When used properly, that first secured credit card may be the foundation for your financial future.

Published January 5, 2016.

Updated March 5, 2020.

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