Secure Your Way into Having a Credit History

I recently met up with a friend of mine who started looking into buying a house, but has no credit history. ‘None at all?’ I asked? She moved to the US only a few years ago, so she never had the benefit of building her credit history as an authorized user for her parent’s credit cards. She doesn’t have US student loans, her utility bills are included in her rent, and her company pays her cell phone bill. She bought a used car and paid for it in cash.

Although it seems like a catch-22, where you need to have a credit history in order to get credit, there may be a few ways out. The most reliable one, which I suggested to her, is getting a secured credit card. Several banks and credit unions offer secured credit cards, which require customers to deposit a certain amount of money as collateral. This deposit, as long as it stays in the bank, generally becomes the credit card holder’s line of credit. Basically, this is a credit card that requires you give the maximum amount you’d like to be able to charge on it – your line of credit – up front. This way, you build your credit history by using it as any other credit card, receiving a statement and paying your balance every month, while the bank has access to your deposit in case you default on it.

Secured Credit Card (from Capital One)

If you decide to close your secured card, say, because you “graduated” into receiving offers and getting approved for an unsecured credit card, you get back the deposit you made for your credit line. There may be some fees, however, for maintaining a secured credit card that end up biting into your deposit, so it’s worth shopping around before settling on the right one.

Below is a sample of a few secured credit card offers out there, with a wide range of minimum deposits and fees.

  • BankAmericard Secured Credit Card ­­– the credit line for this secured credit card offered by Bank of America varies from $300 to $4,900 and is determined by the Bank according to your income and the minimum deposit you would like to make. Your deposit does not earn any interest (it is placed into a ‘Deposit Account’), but after 12 months you may be eligible to “graduate” into an unsecured card and get your deposit back. Annual fee: $39
  • USAA Secured Credit Card– the deposit you make for this card, which can be between $250 and $5,000, is placed in a 2-year Variable Rate CD. On one hand, this means your deposit is locked in for two years, but on the other, at a current annual yield of 0.74%, it has one of the highest CD returns out there. This secured card is available as an American Express and a MasterCard. Annual fee: $35
  • US Bank Secured Visa – you can make a deposit from $300 to $5,000 into a US Bank Savings account, which currently yields 0.05% per year. Your line of credit is written out for the same amount as your deposit, and US Bank reconsiders cardholders for an unsecured credit card after 12 months of good standing. Annual fee: $35
  • Wells Fargo Secured Visa – users can deposit $300-$10,000 for this card, all of which becomes the card’s line of credit. This deposit, however, does not earn any interest (it is placed into a ‘Collateral Account’) so if your goal is to establish credit it is probably best to deposit close to $300 and pay the balance off in full every month. You can deposit any extra money into a savings account or a product that yields at least some interest. Annual fee:$25
  • Capital One Secured MasterCard – this is technically a hybrid between a secured and unsecured credit card. The minimum security deposit ranges from $49 to $200, but the starting credit line starts at $200. So, if you are deemed fairly safe, you may be required to only make a $49 deposit for a $200 credit line. This is a great advantage, as it doesn’t force you to lock in as much money in collateral. Any additional deposit you make over your required minimum translates into a higher credit line, up to $3000. Annual fee: $29

In deciding how much to put down as a deposit, consider your reason for getting a secured credit card. If you plan on only using your card for a few small charges each month, you may as well make a deposit close to the minimum requirement rather than lock in more of your funds into low- or no-yield accounts. On the other hand, if you see this as a step into embracing a credit card-filled life, it may be worth making a larger deposit so that you can get used to statements and paying off balances that more accurately reflect those you expect to face once you have better access to credit. But whichever you choose, don’t forget to pay off your balance in full so that you don’t erase the benefits of having a secured credit card with the ding of a default on your credit history.

And once you’ve proven your creditworthiness with your secured card for a year or so, start looking for unsecured credit cards. Yes, you too can eventually have one of those cards that doesn’t require locking in money upfront and earns rewards!

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