If your credit is weak and you have a history of paying your bills late, you might be stuck with a secured credit card. While
secured cards give you access to credit, they rarely come with rewards programs or other perks, so you might be eager to qualify for a traditional, unsecured card. But how do you make the jump to an unsecured credit card? It’s all about boosting your three-digit
credit score.
What is a secured credit card?
When you apply for a credit card, banks and other financial institutions will examine your credit score and history. You'll struggle to qualify for a traditional credit card if you have a low score and several missed or late payments on your credit reports.
But you might qualify for a secured credit card.
A secured card has a spending limit tied to a deposit you make with the card’s issuing bank or financial institution. If you deposit $1,000, your credit limit will be that same $1,000. You won’t be able to charge more than that amount.
Traditional credit cards are known as
unsecured credit cards. You won’t have to deposit money when taking out one of these cards. Their credit limits are instead tied to the strength of your credit. If you have a strong credit score and clean credit reports, your unsecured credit card’s spending limit will be higher.
Secured cards are easier to qualify for because banks take less risk. If you don’t make your payments, your bank can simply take the money owed from your deposit. Because you can never charge more than what you’ve deposited, you can’t ever owe your bank more than what it can take. Because of this, consumers with credit challenges often turn to secured cards to gain access to credit.
There are downsides to secured cards. First, your credit limit will be low, depending on how much you deposit. Secondly, these cards rarely come with rewards programs or
perks such as travel insurance, lost luggage protection, or trip-cancellation insurance.
But there is one big benefit to secured cards: They give consumers a chance to repair their damaged credit. Once they do this, they can apply for traditional credit cards with lower interest rates, rewards programs, and perks.
How to do this? It’s all about developing good spending habits.
Use your secured card wisely
Do you want to move from a secured credit card to a traditional unsecured one? Use your secured card to make purchases throughout the month. But make sure to pay off these purchases in full on or before your card’s due date.
Every payment will be reported to the three national credit bureaus of Experian, Equifax, and TransUnion. These on-time payments will steadily boost your credit score. That’s because your payment history is the most important factor in determining your score.
Make on-time payments for a long enough period, and your score might rise high enough to qualify for a traditional credit card. How long this takes varies, depending on how damaged your credit is. It might take six to 18 months of regular on-time payments with your secured credit card to boost your score to a level high enough to qualify for a traditional, unsecured card.
How high of a score you need to get that unsecured card varies. You might need a credit score of 670 or higher – putting it in the “good” range – to qualify for basic unsecured cards. If you want a credit card with a valuable rewards program and additional perks, you might need a score above 700. Again, though, the exact score you need for a credit card varies according to these card issuers.
Be careful, though, with how much you spend. Never charge more than what you can afford to pay off in full each month. If you carry a balance on your secured credit card, you’ll have to pay interest on what you owe. And the interest rate that comes with secured credit cards is always high. Interest rates vary but can be as high as 29.99% with a secured card.
If you don’t pay off your entire balance by each due date, the money you owe can grow quickly, even if you don’t make any new purchases. If your credit limit is low, it can be easy to hit that mark and be cut off from making new purchases if you don’t pay your debt in full by each due date.
Using too much of your available credit at any time can also hurt your credit score and make it more difficult to graduate with a traditional credit card. Your credit-utilization ratio – a measure of how much of your available credit you are using – is one of the more important factors in determining your credit score. The lower this ratio, the better it is for your score.
An automatic graduation?
Some card issuers will automatically graduate you to an unsecured credit card. This happens after you develop a record of on-time payments, paying your bill by its due date for six to 18 months.
Once your card transitions to an unsecured one, your bank will refund your deposit and provide you with a credit limit based on the strength of your credit. Typically, it will be higher than the credit limit that came with the secured version of your card.
This unsecured credit card might still be basic and doesn’t offer cash-back bonuses, airline miles, or points for your purchases. It might also come with a higher interest rate. To qualify for a stronger unsecured credit card, you’ll need to continue making on-time payments to boost your credit score to an even higher level.
If the bank that issued your secured credit card doesn’t automatically review your account, you can request, after several months of making on-time payments, that it consider upgrading you to an unsecured card. Your bank isn’t required to move you to an unsecured card, but asking for a promotion never hurts.
Moving on to even better credit cards
Even if you move up to a traditional unsecured card, the odds are that this new card won’t come with either a rewards program or many perks. While your credit might now be strong enough to move on from secured cards, it might not be strong enough to qualify you for the more valuable rewards cards on the market.
To move to these cards, you’ll typically need to continue practicing good financial habits until your score rises to 700 or higher, though the exact score you’ll need varies by bank. To build an even stronger credit score, continue paying your bills on time each month. One missed payment – a payment that you make 30 days or more past its due date – can cause your credit score to fall by 100 or more points.
Not all payments are reported to the credit bureaus, but payments on your mortgage, auto loan, student loan, credit cards, and personal loans are. This doesn’t mean you shouldn’t pay your other bills on time. If you don’t, the entities issuing these bills could charge you with expensive penalties. And if you skip paying these bills, they could send your account to collection. That will cause your credit score to plummet and make qualifying for more valuable rewards cards difficult.
Make sure to pay off as much of your credit card debt as possible. Ideally, you’d pay your entire balance in full each month. But if you can’t do that, use any extra cash to pay down your balance. The less of your available credit you are using, the better it is for your credit score.
