Why Does a Secured Credit Card Build Credit Faster Than a Traditional Credit Card?

With the number of financial products on the market, it’s understandable that one might struggle to understand the pros and cons of each type. Most of us are familiar with the traditional credit card, which enables a person to access funds with interest based on their credit score, but you might not know about credit building credit cards, also known as secured credit cards.

While it’s true that all credit cards help to build your credit, this form of credit card helps to build your credit faster than the traditional product for reasons that we’ll explore today. It’s also more accessible, as some, such as Varo Bank’s credit building credit card, will work with anyone regardless of their credit history. Today, we’ll discuss the mechanics of a secured credit card, including why it is a great option for those looking to improve their credit score.

Because These Cards Require Collateral, They Are More Accessible

The first reason that credit building credit cards help to build credit faster applies to those who couldn’t get approved otherwise: they allow one to begin creating a history of on-time payments. It's an annoying catch-22 that you need a credit score in order to access credit; many credit card companies will deny those who have no credit history, because they can’t judge how risky the customer is to take on.

This is where credit building credit cards come in. Secured credit cards require a security deposit, which is then used as collateral in case the consumer fails to pay; this means that banks and credit unions will be more likely to provide this product to those with a poor credit history or none at all, because they know that they won’t lose out on money either way.

The Credit Limit Is Usually Lower, Which May Allow You to Keep a Better Credit Utilization Ratio

Some banks, like Varo Bank, will set the credit limit at the amount of the security deposit, which allows them to provide zero interest and no fees to consumers. This also means that the limit will be much lower than other credit card products, encouraging you to use less as well. Given that the amount of credit you’re using in relation to what you can use - called the credit utilization ratio - is incredibly important when calculating your credit score, the less you use of what’s available to you, the better.

Having a small credit limit will encourage you to think wisely about what you buy and to pay off your debts quickly, as otherwise you won’t be able to use your credit card; this will help you develop a good record of on-time payments, and it can prepare you for accessing an unsecured credit card. If you get into the habit of only using your credit card when you don’t have cash on hand for larger expenses, such as car repairs, rather than filling up your credit with extraneous purchases, you’ll be better equipped to handle having a larger credit limit. This, in turn, will show an even better credit utilization ratio, further improving your credit score.

Many Banks Offering Secured Credit Cards Will Also Provide You with the Tools to Make Responsible Purchases

As these cards are tailored to those with little to no credit history, it’s a given that many such consumers won’t be very familiar with financial planning; for others, they may be struggling to rebuild their credit after a rough patch, and they need advice on how to make better decisions in the future. That’s why many companies offering secured credit cards also offer resources to teach their customers how to make a positive impact on their finances each month. Some provide budgeting portals that help consumers see where their money is going each month, while others offer free financial planning courses that teach how to plan for the future.

A secured credit card is just one tool consumers need to make great financial decisions and build their credit history, and it won’t work unless you utilize it responsibly; that means paying off the balance every month and using as little credit as necessary to manage your daily expenses. By using the resources available to you through your secured credit card company, you can prepare yourself to access more lines of credit in order to improve your score further.

These Cards Are the Best Option for Those Without Any Credit History, Or Who Cannot Access Other Lines of Credit

A secured card may be a good option for many people, but it’s especially beneficial to those who are just starting out - or who are starting over. Because they are backed by your own money, many banks will give you lower interest rates and less fees than you might get otherwise; you’ll have a lower credit limit, which encourages you to use less in turn. Lastly, many banks and credit unions which provide these programs will also offer you resources to improve financial literacy, helping prepare you to access larger lines of credit without endangering your score further. They’re an excellent choice to safely develop a history of responsible credit usage and therefore improve your score faster than you might with other credit cards.