If your credit score is not high enough to get approved for a traditional credit card, then a secured credit card is a great first step in rebuilding a tarnished credit history. Before you can first use your secured credit card, you must give your credit card provider the amount of cash needed to equal your credit limit. If you are approved for a $300 limit, then you will need to provide your lender with $300 in cash. From there, you will be allowed to use the card as a typical credit card up until your credit limit.
If you are using a secured credit card, you should think of it as the probationary time period before you get your drivers license. While you have your learner's permit, you will need to drive with the assistance of a licensed driver. While you are using your secured credit card, you will need to use it with the assistance of a cash cushion for the lender. Just as new driver with a learner's permit needs time to practice the rules of the road and hone your skills behind the wheel, a secured credit card user needs to practice the rules of responsible borrowing and obey the rules of credit card providers.
Your secured credit card provider is watching your behaviors just as a DMV tester would watch your driving skills when you are about to taking your driving test. The credit card provider will want to see that you keep your credit utilization, or the amount of credit you keep on your card between 30% and 50%. Using the example from above, if you had a credit card limit of $300, the card provider would like you to have no more than $150 of purchases on this card at any given time.
Another skill that your card provider will be watching is your timeliness and consistency of payments. One of the credit usage skills lenders love the best is reliability. They want to know that you can be counted on to make payments when they expect them. Whenever you make charges to your secured credit card, make sure to only charge what you can pay off right away. As you are rebuilding, a best practice is to use the card and then immediately pay off the charged amount on your card, which is as simple as using an app on your phone. If you do not want to pay off charges immediately, then schedule a time to apply payments once or twice a month to make sure that you are staying on top of it.
After many months and sometimes as soon as a year, if you have been following all of the rules of proper credit card usage, you should begin to ask your lender about transferring your secured card to an unsecured card. They may not always allow this, in fact some providers specifically do not; however, it never hurts to ask. If the lender is not ready to move you to an unsecured card, they may give you the option to increase your credit limit by adding more cash to your secured balance with them. It may not be the answer you are looking for; however, it is a good step in the right direction.
Ultimately, at the end of your time with the secured card, you want to earn the right to spend on a credit card without having to provide a cash cushion. This will not only free up your cash for other uses, but it will dramatically help improve your credit score which will save you money on everything from loans to life insurance.