If you’ve hit a snag with your credit, it can be hard to know how to get things back on the right track. One tool for rebuilding your credit, or establishing credit if you don’t have a credit history, is a secured credit card. Secured credit cards look and act like regular credit cards. The card issuer reports your information to the major credit bureaus, so it can give your credit score a boost as long as you use the card responsibly.
How a Secured Credit Card Works
Secured credit cards give you a line of credit. They base the line of credit on your secured card deposit. Some card issuers give you a line of credit that’s equal to the amount you deposit, while others might extend additional credit.
For example, you apply for a secured credit card and you’re approved. You give the card issuer a deposit of $500. If your card issuer gives you a credit line equal to your deposit, your credit line is now $500. The deposit serves as collateral, which means that if you fail to pay your credit card, the card issuer will use your deposit to pay your balance. Even though you’ve made a deposit, you’re expected to make regular monthly payments like you would for any card.
How Secured Credit Cards Build Credit
Since card issuers report your secured credit card activity to the major credit bureaus, they can help rebuild your credit. They will only help if you use the card responsibly. This means making your monthly payments on time. It also means watching how much you charge. Maxing out your credit card can have a negative impact on your credit score, so you want to keep your balance well below your credit limit.
Over time, the secured card issuer may increase your limit without an additional deposit if you have a good payment history. They may also issue you an unsecured card and refund your security deposit.
How to Add Funds to Your Card
Many card issuers will allow you to add funds, which increases your credit limit. Some may only allow you to add funds before you activate your card, while others may let you add funds at any time. To add funds to your secured credit card, contact your card issuer. You may be able to add funds by phone, online or by mailing in a check or money order. Once you send your funds, check your statement or follow-up with the card issuer to make sure the card issuer applies your funds to your security deposit and increases your credit limit. There may be a limit as to how much you can deposit.
- Each secured card provider sets its own rules relative to adding funds.
- Your provider might allow you to open the account with a $200 initial deposit. But you might be approved to add another $300, for example, to the account, for a total spending limit of $500. At other institutions, your deposit and spending limits are the same. You are allowed, for example, to deposit $300 and spend $300. However, after a period of months, you can apply for a credit limit increase. Making your payments in full and on time each month will strengthen your application.
- Some secured card providers only allow you to add funds by phone. At others, you can walk into a brick-and-mortar location and speak to a representative to both increase your limit and add funds.
- At some banks, a secured card can really pay off. After establishing over a period of a year that you pay reliably, you can apply for an unsecured credit card, at which point the bank will refund your deposit in full.
Melinda Hill Sineriz is a freelance writer with over a decade of experience. Her work has appeared on Pocket Sense and Sapling. She specializes in business, personal finance, and career writing. She has worked in insurance sales and financial planning, helping families to manage their money and prepare for the future. Learn more about her and her work at thatmelinda.com.