Credit Building Tips

How Much Will a Secured Credit Card Raise Your Credit Score?

By:
Shaun Connell
Updated
July 7, 2022

The lower your credit score, the harder you'll find it to get loans, financial deals, and approval for accounts. It's a vicious circle; the worse your score, the harder it is to manage money, and the less flexibility you have, with fewer options available to you.

Solution iconFinancial institutions of various kinds have implemented a variety of different methods to help improve your credit score. Among those options is a secured credit card.

You likely have some questions about these credit cards, so let's go through and answer them!

What is a Secured Credit Card, and How Does it Work?

With a normal credit card, you apply and are approved by a bank based on your credit score and history. They are, essentially, the bank letting you borrow money (up to a certain limit), with terms allowing you to repay it over time. It's simple in concept, but the terms of a credit card make things more complicated. Different credit cards have different limits, there are usually rewards programs (like cash back, points of some kind, or frequent flyer miles) attached, and they may have different grace periods, interest rates, and repayment terms.

Secured credit cards are, by contrast, much simpler. They still work roughly the same way; you apply for a card, and a bank approves you.

Secured Credit Card Example

There are numerous differences, though.

  • Secured credit cards generally do not have rewards programs attached. There are various reasons for this, but they mostly boil down to the numbers being small enough that a reward program isn't really beneficial when weighed against the cost of tracking it all. Some of the better-secured credit cards have rewards programs but require high deposits because of it (more on that in a moment.)
  • Secured credit cards generally have much lower limits. Traditional credit cards tend to have limits anywhere from $4,000 to $30,000 or more. Secured credit cards are more likely to start in the $200 range and see numbers as high as $2,500 on the high end. Again, the numbers are smaller. Some exceptions exist – there's a Mastercard with up to $25,000 as a limit, but the terms are exceptional. These cards are rare.
  • Secured credit cards often have high interest rates, typically around 25% APR, whereas traditional credit cards can be significantly lower. Again, some high-end secured cards have lower interest rates, but generally, they'll always be on the high end of comparable non-secured credit cards.

The biggest difference, though, is the security deposit. It's what makes the credit card "secured" in the first place.

Solution iconThe security deposit is a lump sum of money you give to the bank to put on hold. It's a prerequisite for a secured credit card. Most secured credit cards start around $200, though some are closer to $99 on the low end or as much as $500 on the high end. Typically, the higher the deposit, the better the terms and the lower the interest rate.

You can see some examples of secured credit cards and their terms here.

Some people view a secured credit card as a form of debit card or prepaid card because you have to put money into it to get it. That's not quite accurate, though. You don't use that money to pay for your purchases. Instead, it's a form of security for the bank so they're not stuck with a negative balance.

Usually, the deposit is 1:1 to your credit limit, at least initially. You put $200 into a security deposit and get a secured credit card with a $200 limit. Then, you can buy things up to $200 on the card and pay them off over time. If you end up defaulting on the credit card, the bank has your money to cover it, so they don't assume much risk. "Secured" in the name of the card refers to security for the bank, not for you.

Your money isn't lost, though. Most secured credit cards have some mechanism for retrieving the money. Sometimes, it's simply refunded to you if you close the account. Other times, as you use the card and pay it off appropriately, the security deposit is slowly applied to purchases to reduce your costs or even slowly refunded to you over the course of months.

Obviously, all of this varies depending on the issuing financial institution and the terms of the specific secured credit card you're looking into.

How Does a Secured Credit Card Raise Your Credit Score?

How do you pay for the things you buy?

If you pay in cash or use a cash-equivalent debit card, your transactions aren't reported to the credit bureaus. As such, they don't earn you any benefit to your credit score. A credit card, as we all know, is a line of credit and is thus reported. Maintaining an account in good standing and carrying as low a balance as possible (preferably zero) helps build your credit score.

A secured credit card is still a credit card. Therefore, purchases made using a secured credit card – and the payments made to pay them off – are reported to the credit bureaus. Making payments on a secured credit card will gradually raise your credit score. Additionally, having lines of credit and a good debt-to-income ratio will benefit you as well.

Raising Credit Score

Why not just use a regular credit card instead of a secured card? Well, as many of you likely know firsthand, you probably can't get one if your credit score is low enough.

The biggest benefit of a secured credit card is that, because of the security deposit, banks and financial institutions are much more likely to offer them to people with lower credit scores. The security deposit helps mitigate some of the risk the bank would otherwise assume.

Moreover, after using a secured credit card appropriately for a while, you may be able to "graduate" to an unsecured card without having to close your card and open a new line of credit. This maintains continuity in accounts, which is beneficial since "age of credit accounts" is a credit calculation factor. Banks like this because you've already proven you can stay financially solvent with the secured card, and you stick with them to give them your business.

How Much Will a Secured Credit Card Raise Your Score?

There's one all-important question left to answer, and that's "how much will a secured credit card help?" If you're talking about five points here, that's barely anything and might not be worth the effort. On the other hand, if it can rocket your credit score up 200 points, you'd be jumping at the chance.

Examining Credit Report

The truth is, it's highly variable.

  • If you have no credit score, opening a secured credit card and using it appropriately can set your initial calculations and behavior to around 600 in short order. That's a pretty good place to start, and since you won't have any blemishes on your credit report, it's relatively easy to keep building it up to the 700+ range.
  • If you have a fair credit score (that is, from around 550 to 650), using a secured credit card will help improve it a moderate amount. Within a year of appropriate usage, you will likely be able to get up to 650 or 700 without much issue.
  • If you have poor credit but have relatively few blemishes on your credit report, a secured credit card can help significantly. Several factors can contribute to a low credit score (under 500) without being abjectly terrible, like defaulted loans, accounts in collections, or bankruptcy. Simply having young credit, cycling through credit accounts, or other suspicious but not-that-bad behaviors can result in a lower score. By opening and using a secured credit card, you can get as much as a 100-150 point boost, bringing you into the Fair credit range.
  • If you have terrible credit with blemishes like defaulted accounts and accounts in collections, a secured credit card can help a lot. Opening and using a secured credit card – or even more than one, if you can afford it – can see your credit score rise by as much as 200 points. This can be boosted even more if you can pay off accounts in collections with a "pay for delete" and pay down other debts as you go.
  • If you have a good credit score, as in something over 680, chances are you're not going to see nearly as much of an increase. Many people find that their score can rise by 30-50 points, but the difference is much less life-changing than it is when your credit score is lower.

Keep in mind that the more blemishes there are on your credit report, the harder it will be to raise your credit score until you deal with them. That's why we always recommend pulling your credit report, checking for errors to get them removed, negotiating to have accounts in collections removed, and employing other strategies to mitigate the damage.

How Do You Properly Use a Secured Credit Card?

If you're interested in using a secured credit card to improve your credit score, here's how.

Step 1: Do your research.

The first thing you need to do is some research. While most secured credit cards are fairly similar, they are not all created equal. There are many different cards with different terms. Figure out what you can afford as a security deposit; a higher deposit will get you a higher credit limit, and a higher credit limit improves your debt-to-income ratio (as long as you don't carry a balance), so it's generally more beneficial. However, make sure you don't try to take on more than you can afford; jeopardizing your ability to pay off your credit will only make your credit score worse.

Step 2: Apply for a card.

Once you've picked a card, apply. Since secured credit cards are usually aimed at people with low credit scores, many banks will either have very broad terms or won't check your credit score at all. If they don't check, they likely check something else, like the ChexSystems Report. Some of the stricter or better cards will be hard to gain approval for, but most secured cards will be open to you as long as your expectations are reasonable.

Step 3: Use your card, and keep it paid off.

The key to building your credit with a secured credit card is to avoid carrying a balance. Treat it as you would cash; only make purchases you can afford, and pay them off immediately. Carrying a balance does not improve your credit score, and the interest charges will make it harder to keep paying it off.

Paying Off Secured Credit Card

Step 4: Consider additional credit-building strategies.

While you're working to improve your credit score using a secured credit card, you can also try out additional strategies. For example, you can get credit builder loans without a credit check, and paying those off (if you can afford them in the first place) is another good avenue for improving your score.

Step 5: Request increases to your credit limit.

After you've been using your secured credit card for several months, keeping it paid off effectively, you can contact the issuer and request a higher credit limit. A higher credit limit makes your debt-to-income and credit utilization ratios look better, especially if you continue with reasonable spending. Note, though, that this only works if you don't start using it as an excuse to spend more money and carry a balance.

Step 6: Graduate to an unsecured credit card.

After about a year of using a secured credit card effectively, your credit score will have gone up, and, more importantly, you will have proven to the issuer that you have financial responsibility. You can often request a graduation from your secured card to an unsecured card. This maintains your existing account but allows you to transition to a card with added benefits, such as a rewards program, a higher limit, and a lower interest rate. Once you've done this, congratulations! You've made it and can leave secured credit cards behind.

After reading today's article, do you have any questions about secured credit cards, how they work, or how they may be able to boost your credit score? If so, please feel free to reach out and ask your questions at any time! We'd be honored to assist you on your credit-building journey however we possibly can!

Written By:
Shaun Connell
Shaun Connell is a personal finance and credit expert with a passion for helping individuals eliminate debt and improve their credit. He's enjoyed writing investing and financial content for over 15 years, with expertise in real estate, debt, banking, credit, and wealth building. His work has been seen by millions on the web.

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