If you’re trying to build credit for the first time or improve a credit score damaged by past financial problems, you may have heard advice about using a secured credit card. Using a secured card can be an effective way to establish a positive credit history, but it’s not a one-size-fits-all strategy. For some consumers, using a secured card can help their credit within as little as six months of opening the account — for others, notable improvement can take much longer.
A secured card is, as the name suggests, secured by a deposit — say, $500 — that serves as your credit limit. If you fail to make a payment, the card issuer can take your deposit. Besides that, it works just like an unsecured credit card, or what you might consider a “normal” card. To build credit using the card, you should use as small a portion of your available credit as possible, because a low credit utilization rate will help your credit score, and you need to make your payments on time. Payment history has the greatest effect on your credit score, so you want yours to be free of missed payments.
You may want to get a secured card if you have no credit history or have a poor credit history — basically, if you can’t get any other kind of credit card, this is your ticket to getting your credit score up. How things progress from that point depends heavily on what’s in your past.
“My general experience is that someone who has no credit is likely to benefit more quickly from a secured card, because there’s no negative information — there’s just no positive information, so in as little as six months someone who is just building credit can get an unsecured credit card,” said Gerri Detweiler, Credit.com’s director of consumer education. There are few products that allow you to “graduate” from a secured credit card to an unsecured one, but once you’ve worked your way up to a good score, you can apply for a card you can reasonably expect to qualify for. (Here are some of the best secured credit cards in America for you to consider.)
What If You Have Bad Credit?
The person with a messy credit history doesn’t have it so easy.
“Someone with negative or bad credit has more going against them, because it’s not that they just need this positive reference, which they do, it’s also that the negative information is still carrying a lot of weight on their credit,” Detweiler said.
To know whether or not you’ve reached the point where you can get an unsecured credit card, you need to track your progress. You can do that by getting a free credit report summary every month on Credit.com.
As much as you may want an unsecured credit card — secured cards sometimes have annual fees, plus there’s the deposit you have to put down — keep in mind that a secured card isn’t going to affect your credit differently than an unsecured one.
“The score doesn’t look at a secured card any differently than an unsecured card,” said Barry Paperno, a credit score expert who has worked with FICO and Experian. “It will look at the fact that it’s a credit card, when the card was opened, the credit limit and the balance, and of course the payment history. In that way it will help establish credit just like an unsecured card.”
If you have a history of delinquencies, collection accounts or any other negative information on your credit report, it could take a while for the secured card activity to turn around your credit score, but it’s worth the time and effort. Credit scores have a serious impact on many aspects of your finances, so it pays off to improve and maintain a good credit score.