Using Secured Credit Cards to Build and Rebuild Credit

by Shawanda Greene

Credit CardsIt’s not often we talk about credit on You Have More Than You Think. But recently, I had a conversation with a friend that reminded me how important it is to have stellar credit.

I’ve been nagging her about refinancing the mortgages on some real estate she owns.

Unfortunately, my friend’s credit isn’t great. Which means getting approved for the lowest mortgage interest rates is challenging.

Although I’m clearly not a fan of debt. I, strangely, don’t have a problem with credit.

My friend’s inability to take advantage of historically low interest rates will cost her tens – maybe even hundreds – of thousands of dollars.

You can’t pickle enough cucumbers, make enough laundry detergent, or chocolate cover enough strawberries to yield that level of savings. That’s some serious cash.

So, I feel compelled to write this blog post about how to build or rebuild a good credit history.

Enter secured credit cards.

Back when I was a youngster, building credit was easy.

Banks lured poor – and I literally do mean poor – college students into applying for credit cards with t-shirts and 6-inch cold cut coupons.

With no credit history and no income, my 18-year old self was approved for a MasterCard with a $1,000 credit limit. Ah, those were the good ol’ days.

After the Credit CARD Act of 2009 passed into law, individuals under the age of 21 couldn’t get a credit card without a cosigner or (gasp) proof of adequate income to repay the obligation.

But all hope is not lost.

Secured Credit Cards Explained

When you don’t have a credit history, people don’t want to loan you money.

And why should they? They don’t know you. And there’s no reputable person who’ll vouch for your character.

Would you lend a complete stranger money? Of course not.

Maybe if said stranger gave you something of value in return, you’d make the loan.

In the event the borrower fails to repay the debt, collection is a breeze.

Instead of standing in her front yard shouting, “I want my scrilla!” you tell that grimy hussy you’re keeping her stuff.

I want my scrilla!

Sure. You probably won’t collect any late fees or interest charged for the loan, but at least you recoup your principal.

A secured credit card works the same way.

For example, you apply for a credit card with a $500 limit. Once approved, you deposit $500 into an account the lender will hold as collateral.

You can use a secured card how you’d used an unsecured (I believe the technical term is “regular”) credit card.

If you’re good, you can move to a traditional credit card in about a year or so.

Important Matters

Before applying for a secured credit card, make sure your account’s activity will be reported to the three major credit bureaus: Trans Union, Equifax, Experian. Otherwise, you’re not building a credit history.

You may have to pay an application fee, and you’ll likely be subjected to an annual fee for the secured credit card. Therefore, it’s important to comparison shop. If you’re a member of a credit union, you should start your search there as they tend to hit you with lower fees. Also, compare benefits and features of several secured credit cards at Bankrate.com.

After you receive your secured credit card, it’s imperative you do at least two things for me:

1. Don’t go over your credit limit. Not much to elaborate on there. Just don’t do it.

2. Pay your bill time. Thirty-five percent of your FICO score (the credit scoring model used by most lenders) is determined by your payment history.

You can practically eliminate the risk of missing your due date by setting up automatic minimum payments on your account.

If you don’t maintain enough money in your checking account to cover a $15 to $35 monthly payment, then as my mother always says when we don’t have our priorities straight, “You worried ’bout the wrong thang.”

Get your money right first, pimp. (Loosely translated in nerd speak that’s “Practice proper money management principles first, and then worry about building a good credit history…pimp. Haha! I couldn’t help myself.)

What tools have you used to successfully build or rebuild a good history?

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{ 11 comments… read them below or add one }

MLISunderstanding January 27, 2012 at 12:49 PM

I didn't get my first credit card until 2010 (I was 26). It just wasn't necessary until that point in my life, and I didn't quite realize how much in everyday life would be affected by that. Everyone ASSUMES you have a credit card (and, say, can wait a few weeks for reimbursement when you've laid out cash). I didn't apply until 2009, and then I was turned down — for example, by a card marketed to students and those with little to no credit history. I didn't have any poor credit decisions/behavior reflected in my report — in fact, I paid off my undergraduate loans within 5 years after graduating college, and I didn't even have any way of getting into consumer debt — but the thin credit file was an issue. In the rejection letter, the reason my application was denied wasn't specifically my credit score, but the fact that I "had no revolving credit" accounts. Well, I KNOW that! That's why I picked the darn card in the first place.

Anyway, I considered a secured credit card, but around that time, I was flying a lot on JetBlue, and I thought it might be convenient to have a card that earned TrueBlue points. I made one last attempt to get a card (my credit score was around 680 at this point, I found out from my concurrent rental application). And so I was approved for an American Express card w/ JetBlue. I used it for a year, racked up points (that will pretty much cover honeymoon flights this fall), and of course paid it off in full EVERY month. By the time its annual renewal was up, so was my credit score. I was able to switch to a Chase Freedom card (with $200 cash back in the first month) when AMEX wouldn't waive their $40 annual fee. It was necessary when I first opened the account, but I didn't see why I should keep paying it when I'm paying off my balance in full.


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