Did you know you can establish credit with secured credit cards?

Date: June 25, 2020

One of the most daunting tasks for young adults (and some not-so-young adults) is establishing credit or rebuilding credit after some sort of financial disaster, like a bankruptcy. It’s hard to convince a lender to be the first to extend credit to someone with a nonexistent or damaged credit report. There is, however, a fairly simple method for opening a new credit card, regardless of your credit quality, as long as you’re willing to pay for it. The method is the secured credit card strategy.

A secured credit card looks and performs exactly the same way as a traditional (unsecured) credit card. The only difference is the deal you cut with the issuing bank prior to it opening your account. With a secured card, you are required to make a deposit with the bank; the bank will in turn issue you a credit card with a credit limit equal or close to the deposit. And because your deposit matches your spending limit, the bank is fully protected from non-payment or default because you’ve essentially paid in advance for any usage of the card.

Secured credit cards can help establish credit because their activity—purchases and payments—are almost always reported to the three major credit reporting companies (CRCs): Equifax, Experian and TransUnion. This allows you to build up a credit report consisting of prudent purchases and timely payments, which naturally leads to improvement in your credit score. Of course, if you miss payments or run up a large balance, then they can also cause your credit scores to be lower.

Credit scoring models do not distinguish between secured cards and their more common counterparts, unsecured credit cards, which do not require deposits. They are not, however, a silver bullet for people with poor credit scores. You must be realistic with your expectations. Adding a secured credit card (or several) to a credit report with a VantageScore score of 600 can’t instantly produce a VantageScore score of 800. It can take many months to rebuild a poor credit report to the point where it’s scoring well again, but adding secured credit cards can be a good first step in the process.

When you’re shopping around for a secured credit card, make sure you choose one that is actually reported to all three CRCs. You confirm this by doing some online research or calling the card issuer. If it is not reported to the CRCs, a secured card won’t do your credit reports and credit scores any good.