How to Build Credit With a Secured Credit Card

iQuanti: If you're looking to build your credit, a secured credit card can help you get it into shape while taking steps like making on-time payments, keeping a low balance, and paying off your debt. Let's dive deeper into how secured credit cards work and how you can use one to build credit.

How does a secured credit card work?

A secured credit card is a way to build up your credit score if you have no credit, poor credit, or limited credit history. This is a good alternative to help you manage an unsecured credit card in the future.

A secured credit card provides a lot of the same benefits as many standard credit cards. The difference between a standard credit card and a secured credit card is that a secured card requires a deposit, which gives the lender protection if you default on your credit obligations. You'll get your security deposit back if you responsibly manage your credit line. 

Secured credit cards can come with lower credit limits and higher interest rates than standard credit cards, so it may be more difficult to make larger purchases with a card like this.

Many credit card companies may ask you to make a deposit that matches your credit line. For example, if your credit line is $250, you would pay a deposit of the same amount. Other lenders only require a minimal amount of $50 to open your account.

Once you've maintained a good standing credit history, your creditor may return your deposit and issue you an unsecured credit card. You can also get your deposit back and close your account.

How can I build credit with a secured credit card?

Here are some ways you can build your credit with a secured credit card:

Make on-time payments

One crucial step to building your credit is to make on-time payments. If you can, pay your monthly statement balance in full every month before the due date. Making on-time payments can help you build up a good payment history, which makes up 35% of your credit score. 

If you pay off the balance on your secured credit card every month, you can build your credit without paying any interest on your account. Because secured credit cards tend to charge higher interest rates, it can be best to make timely payments. You can set up one or two automatic payments to draft from your bank account each month before your due date, so you never miss a payment or get surprised by late fees and interest fees. 

Keep your balance low

Another step to building your credit is to keep your balance low. Keeping a low card balance shows creditors that you can maintain your finances without relying on credit. You can avoid maxing out your secured credit card by making small everyday purchases like putting gas in your car or buying coffee. You can also use your secured credit card once or a few times a month just to show regular activity. The rule of thumb is to spend less than 30% of your credit line each month. This may not seem like very much, but it will keep your balance low. 

Check your credit report

As you take steps to build your credit, you'll want to stay informed and periodically check the progress of your credit score. Your credit report will help you understand your credit history and how much debt you have to pay off. There are websites online that offer free credit reports once a year. 

Building your credit can seem like a tough job, but it doesn't have to be. You'll be reaping the benefits of your hard work in no time!