How a Secured Credit Card Works
The first step in opening a secured credit card is putting down a deposit. The size of the deposit depends on the bank or lender issuing a card. One company may require a $200 deposit but give you a $500 credit line, while another could make your deposit amount and credit line one and the same. You may want to compare different secured credit cards to figure out which terms make the most sense for you.
Once you put down the deposit and open the account, you can use your secured credit card the same way you’d use an unsecured card. You can cover one-off expenses, buy groceries, pay recurring bills—or use it for essentially anything you’d put on a standard card. Just remember that the deposit you put down to get the card doesn’t serve as a form of payment: You still make payments on your card every month. The deposit is just there as insurance for the issuer in case you stop making payments.
As soon as you start making purchases and payments on your secured card, your lender will likely report the activity to one or more of the three national credit bureaus. That’s a good thing—as long as you use your card responsibly—because all of that activity will help you develop a history of on-time payments and responsible credit use, helping you build a strong credit score.
If your secured card has a low credit limit, you’ll need to be careful about how you use it. In addition to paying your bills on time, it’s important to keep your credit utilization ratio low. Credit utilization refers to how much of your credit line you’re using. A good rule of thumb is to aim for 30% or less credit line usage at all times. Not only does this help your credit score, but it may also help you build a habit of keeping balances low and thus avoiding high interest charges.
Keeping your credit utilization low can be more challenging with a low credit limit. For example, if you put down a $300 deposit and are granted a credit limit of the same amount, you’ll need to keep your balance under $100 at all times to avoid hurting your credit score. If you were hoping to put a large purchase on the card or want a bit more flexibility, you may wonder what options you have to increase your credit limit.