If you look at your dog and he stares back at you probably wondering, “Why do you keep me in this tiny cage of an apartment?”, you might start thinking about buying a house.
But if you have no credit history, it can be hard to do adult things like get a mortgage, negotiate insurance rates or even rent a bigger apartment for Fido. The easiest place to start building good credit is with a credit card. But how do you qualify for a credit card with no credit?
A secured credit card may be the route for you.
What Is a Secured Credit Card?
A secured credit card is a great way to rebuild if you have damaged credit or no credit at all. You put a deposit down as collateral, and the bank gives you a credit card with a limit that’s around the same amount as your deposit. The bank essentially uses your deposit as your line of credit.
So if you put $200 down, your credit line on most secured cards will be $200. Keep in mind that once you deposit that cash, you generally can’t withdraw it until you cancel the card, so make sure you don’t need that money any time soon.
Unsecured credit cards, on the other hand, only have the cardholder’s promise to repay.
Make a Secured Credit Card Work for You and Your Credit Score
Like unsecured cards, secured credit cards charge interest, so you still need to pay them off on time and in full every month to avoid fees.
To make your secured credit card work in your credit score’s favor, you need to know what a credit score is and follow some simple rules:
- Pay your bills on time.
- Keep your credit usage below 30% of your credit limit.
- Don’t open multiple cards at a time.
How Does a Secured Credit Card Build Your Credit Score?
The issuing bank reports your activity to at least one of the major credit bureaus, so after using and paying your card off for a while, your credit history and score will grow.
That’s what Matthew Ramachandran did when he was 18. He put a $400 deposit on a Bank of America secured credit card, which helped him grow his nonexistent credit score to a 700 in eight months. Asked about his tips for using secured credit cards to build credit, Ramachandran said, “I always used less than 30% of my credit limit.”
After hitting that 700 credit score, he canceled the secured card and got approved for an unsecured Chase Visa with travel rewards. Now he now makes business purchases with unsecured cards to get travel rewards. He even stayed at the Ritz-Carlton in Hawaii for five nights with his points.
All thanks to that first secured credit card.
How to Get a Secured Credit Card
You can visit a bank or apply online. If you’re a credit union member, you may want to check there first because they often offer lower interest rates and waive annual fees.
If you have a bankruptcy on your record or a history of missed payments, the bank may not approve you for a secured credit card. If you’re denied, you have a legal right to know why. You can contact the card issuer for that information.
If you find that the card issuer rejected your application due to an error on your credit report, you can — and should — dispute the error with the credit bureaus. Once the issue is resolved, you can contact the card issuer to reapply.
How Much Will a Secured Credit Card Help my Credit Score?
There’s no hard-and-fast rule on how to use a secured credit card to build credit. The key is to keep usage low and pay off your balance in full every month.
Card issuers want to keep you as a customer, so they’ll usually offer you an unsecured card if you’ve made about a year’s worth of on-time payments.
Jen Smith is a junior writer at Codetic and gives tips for saving money and paying off debt on Instagram at @savingwithspunk.