Using a Secured Credit Card to Build / Rebuild Your Credit

Introduction: Consumers who have had financial problems in the past often use secured credit cards to rebuild their credit profiles. It begs the question: Can a secured credit card help you raise your credit score? The answer is, it depends. It's not enough just to possess one of these cards. It's how you use it that matters. In short, a pattern of responsible usage could help you rebuild a damaged score over time. Here's how...

Reader Question: "I am trying to raise my credit score enough to buy a house later this year. I don't currently have any cards because of my past history. Somebody told me I could use a secured credit card to rebuild my credit score rating. Is this true? And if so, how should I use the secured card in order to boost my rating? Any tips or suggestions would be welcomed!"

Yes, using a secured credit card could potentially raise your score over time. In fact, using any form of credit can improve your score -- as long as you use it responsibly. I'll get into what "responsible" means in just a moment. But first, some definitions are in order.

What is a Secured Credit Card?

Definition: A secured credit card is one that requires a deposit from the customer, before it can be used for any purchases. You are "securing" it with an up-front payment before using it, hence the name. On average, the initial deposit for these cards will range between $500 and $1,000, though you might be able to obtain one with a lower deposit amount.

For example, I might pay $500 for a secured credit card and then be able to charge that amount over time -- or a percentage of that amount. If I make all of my payments on time, the bank might increase my limit without additional deposits on my part. I might be able to rebuild a damaged credit score in the process.

At this point, you might be wondering why somebody would want to pay a deposit just to use a credit card. After all, it seems like you are just reducing the amount of money you have at your disposal. If you put down a certain amount of money in advance to get a secured credit card, and they only allow you to charge a certain percentage of that deposited amount, you're essentially giving money away. Right? Well, this brings us to the question you've asked: Can I use a secured credit card to improve my credit score?

Using It to Rebuild a Damaged Score

People who use these cards do so because they cannot qualify for a regular credit line, usually because they have financial problems in their recent past. For example, someone who has just declared bankruptcy will probably be turned down for a standard credit application.

This puts the person between a rock and a hard place. On one hand, people know that using a credit card wisely can help improve a credit score. In fact, the "payment history" factor influences your score more than any other single factor. But if you can't qualify for a credit card, you can't establish a new (and improved) payment history. So what do you do?

This is why some people use secured credit cards to rebuild their credit scores over time. It's the only type of card they can get in their current financial situation. They simply have no other choice, other than paying cash for everything (which is not a bad idea actually).

Here are some tips for using this strategy:

1. Find out about monthly fees and other charges.

Secured cards usually carry a higher interest rate than a regular unsecured card. You'll probably have to pay an annual fee of some kind, as well. So be sure to find out about these things in advance, before you sign up for one. Know what you are getting into.

Secured credit cards come in a wide variety of "shapes and sizes." Some of them can be a good value, while others simply take advantage of consumers by charging outrageous fees. It's like everything else in the financial industry -- there are good ones and bad ones.

Some creditors might even require you to pay an "insurance" fee every month, which is simply an attempt to make more money from your bad credit situation. So shop wisely and read the fine print. Don't jump on the first offer that comes along. Comparison shop.

With a bit of homework, however, you can find companies who offer secured credit cards without all of those fees. This is the kind of card you want to use to rebuild your score, because it won't add to your existing debt.

2. Use your card wisely and sparingly.

The best way to use a secured card to improve a credit score is to make small charges on a regular basis, and then pay the balance down each month. The last thing you want to do is accumulate a huge balance on your card. This defeats the whole purpose and might even lower your score. Remember, you're trying to use a secured credit card in a way that rebuilds your credit score rating, and this means you should maintain a low balance.

3. Pay all of your other bills on time.

Your payment history accounts for approximately 35% of your overall credit rating. It weighs more than any of the other scoring factors. So, in addition to paying your secured credit card balance on time every month, you must pay all of your other bills on time as well. This creates a pattern of responsible usage, which is the key to building -- or rebuilding -- a solid credit history.

4. Consider paying down your existing debts.

The amount of money you currently owe on your various debts has a direct influence on your credit score. If you are nearly maxed out on one or more credit cards, it's going to have a negative impact on your profile. So while you are using a secured card to rebuild your credit rating, you should also consider paying down your existing debts.

Within the financial industry, this is referred to as your "utilization ratio." If you're using a high percentage of your available credit limit, then you have a high utilization ratio. This can actually lower your score. By making small purchases from time to time, and by paying your balance down each month, you will likely have a better chance of improving your score.

Start with the debts that have the highest interest rates, such as any high-interest cards you've used in the past. This is a sound strategy for getting your finances under control in general, and also for improving your credit over time.

Disclaimers -- This article answers the question: Can I rebuild my credit by using a secured credit card? This information has been provided as a general reference and should not be viewed as financial advice. The strategies mentioned above might not work for all consumers. We make no claims or guarantees about the strategies mentioned above, and we encourage you to continue your research beyond this website. You might consider using a non-profit credit-counseling agency. These organizations specialize in offering one-on-one advice tailored to a consumer's specific situation.