Updated April 19, 2018
In 2008, I moved to the U.S. with my wife, Margarita, after living in Moscow. Although Margarita had an impressive career in Russia, she was not a U.S. citizen and had no credit history or credit score. If you don’t have a credit score in the U.S. this basically means you don’t exist, at least in the eyes of lenders. In fact, one in 10 Americans are considered “credit invisible,” meaning they don’t have enough credit history to produce a credit score.
This was a problem we knew we had to fix fast, especially if Margarita wanted be able to take out credit cards, an auto loan, or even apply for an apartment lease in the future.
By following a few basic steps, within 12 months, she had a very good credit score. Within 18 months, she had an excellent credit score and qualified for a rewards credit card with a $25,000 credit limit.
How to open a secured credit card
Opening a secured credit card is relatively easy. You have to provide the bank with a deposit, which is typically $200 or more. The bank will keep the deposit as collateral and will provide you with a credit limit equal to your deposit — some cards may even give you a higher limit without requiring a larger deposit. In Margarita’s example, she gave the bank a $500 deposit and received a $500 credit limit.
Once open, the credit card works like any other. Your credit limit, balance and payment information is reported to the three major credit bureaus. The only difference: If you fail to pay your credit card on time, the bank can take your deposit and apply it toward the debt.
So, the bank has a guarantee that they won’t lose money. And, you have the opportunity to prove that you will use your credit wisely.
How to use a secured credit card
Given that I was a bank credit risk manager at the time, I knew a bit about credit scoring. So, I made sure Margarita followed this strategy:
- She used the card every month, but for a very small amount. Her typical monthly bill would be around $10.
- She made sure that she paid the balance in full and on time every month by signing up for automatic payments.
- She subscribed to a credit scoring service to watch her score improve over time.
It took about six months for Margarita’s score to cross the 600 threshold. About 18 months after starting, she had a score well above 700. At that point, she applied for a rewards credit card. It had a great sign-on bonus and a frighteningly high $25,000 credit limit.
So, it only took a year and a half for someone to go from being a credit nobody to one of the most sought-after customers in the country. What was the trick? It is actually very simple.
3 key rules to follow
Use your card every month
In order to have a FICO® Score, you must have activity on your credit report in the last six months. If there is no activity on your report in the last six months, you cannot get a score.
Activity does not mean you need to go into debt. You can make a single purchase every month (even for just $1) and that is considered activity.
Keep your utilization low
One of the most important components of your credit score is utilization, making up 30% of your FICO® Score. Your utilization is calculated by dividing your statement balance by your total available credit. People with the best credit scores have utilization levels of 10% or less, but at most, you want to stay below 30%. That means if you have a credit limit of $1,000, you should not spend more than $300 a month.
The best strategy with a secured credit card is to select one small, recurring transaction and automate it. For example, use your secured credit card for your monthly Netflix or Spotify® bill.
Pay your bill in full and on time every month
The most important part of your credit score is a history of on-time payments. This factor alone comprises 35% of your FICO® Score. Even a single missed payment can have a very negative impact on your score. The best way to ensure that you don’t miss a payment is to set up autopay.
Additionally, make sure you pay your balance in full. If you pay the balance in full, you will not have to pay interest. And there is nothing more ridiculous than paying interest on a secured credit card. Remember: Your credit limit is equal to your deposit. You are literally borrowing your own money. But if you pay interest (at a high rate), you will be paying a bank to borrow from yourself.
This is just a long way of saying that Margarita’s approach worked. If you want to use a secured credit card to build your credit score, just use it every month for a $10 charge. And pay that balance in full and on time. As a result, your score will improve quickly.
How to select the best secured credit card
When selecting a secured credit card, we recommend that you focus on the annual fee — you shouldn’t have to pay one. You can find our roundup of the best secured cards here.
Our top choice for 2018 is the Discover it® Secured.
How the Discover it® Secured works
There is a typical $200 security deposit, but you can receive it back if: 1. You pay your balance in full and close your credit card account, 2. You qualify to be refunded your deposit during one of Discover’s monthly automatic account reviews (starting at eight months from account opening) and 3. You upgrade to an unsecured card.
Cashback rewards: In this cashback program, you earn 2% cash back at restaurants or gas stations on up to $1,000 in combined purchases each quarter and 1% cash back on all other purchases.
The cashback match. The Discover it® Secured has a new cardmember bonus where Discover automatically matches all the cash back you’ve earned at the end of your first year. The cashback rate is great in general since few secured cards have rewards, and it’s primarily beneficial for people who typically spend on gas and dining. The cashback match you receive is unique because there is no minimum spending requirement for you to earn the additional cash back. Most cards set a three-month time period and minimum spend for you to earn a new cardmember bonus, but not Discover.
Upgrading from a secured card to a traditional, unsecured card
Typically, for secured cards from the major issuers like Discover, Capital One® and Citi®, the upgrade from a secured card to unsecured card involves:
- An automatic review process. This checks your eligibility for an unsecured card. The review process varies by issuer with some cards starting it eight months from account opening and others waiting until 18 months.
- Receive your security deposit back. If you qualify for an upgrade and your balance is paid in full, you will receive your security deposit back.
- Receive an unsecured card. In addition to receiving your security deposit back, you will be transitioned to a traditional, unsecured card.
If your card doesn’t have an automatic upgrade process, we recommend the following:
- Check your credit score often to track your progress toward building credit.
- Search for a new card that fits your credit score. There are plenty of options for fair, good or excellent credit — and the better your score, the more options available.
- Check for pre-qualification. Before you apply for a new card, check to see if there’s a pre-qualification feature. This allows you to check your approval odds and shop around for the best offer without hurting your credit score. But, keep in mind pre-qualification isn’t a guarantee of approval.
Margarita opened the BankAmericard® Secured credit card with a $39 annual fee. Unfortunately, migrating from the secured to the standard credit card was painful at the time as the process wasn’t smooth. But, in the end, it worked — she built excellent credit in a year and a half. We recommend sticking with a no annual fee secured card if possible — and there are plenty of options. If you use a secured credit card wisely, you will not have it for long and will soon have a good or excellent credit score. So, even if you don’t use one of our favorite secured cards, we still highly recommend you follow our strategy — and you should get a visible result.