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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Protect Your Money by Checking Your Statements, my experience

To follow up on yesterday’s post, I thought I would add two recent experiences I had that confirm the importance of checking your credit card statements:

Restaurant Bills:  There is a restaurant I’ve been to twice – the latest one quite recently – and that after both times I went, I noticed that my credit card bill was $1 more than what I had signed for once I added tip (I usually write the total amounts on both the restaurant and my copy of the receipt, and make sure to take mine home).  Admittedly, $2 doesn’t amount to that much, but what if it were a restaurant I visited more frequently?  And what if they add $1 to every customer’s receipt?  I doubt I will ever visit that restaurant again, but this experience has taught me to keep my receipts and track the amounts charged to my credit card – just skimming through the bill and verifying that I did in fact eat at that restaurant is not enough to make sure I’m not being overcharged. 

Automatic Payments:  A few months ago I moved and had to transfer my internet and cable service, for which I had automatic payment set up.  I called the company, and was told that they would have to cancel the account linked to my old address and set up a new one with my new address.  As I checked my credit card statement this week, I noticed that there had been no charges from my internet/cable provider in the past three months.  After calling them, I found out that since they had to set up a new account, the automatic payment did not carry over, and my payments were actually overdue!  Of course, I pointed out that I had not been notified that I would be un-enrolled from automatic payment, and the charges were waived.  Nonetheless, even though it was their fault in principle, I bet that if I had gone for many months without paying my bill, they would have been less understanding.

The moral of these anecdotes?  Checking your credit card statements once a month will help you guard your money, enabling you to notice and fight back overcharges and unfair fees.

Give Your Credit Card “Junk Mail” a Chance

It goes without saying that, for security reasons, you should never throw away any regular mail you receive from your credit card company without opening it – you do not want PIN numbers or new credit cards on your name going straight to the dumpster where someone can find them.  But sometimes you might even find a useful announcement inside those envelopes.  As I wrote a while back, Discover at least once notified its customers through mail that it would be giving 5% cash back on restaurants for a month.  If you did not open that letter, you probably would only have found out about it if you diligently visit your online account.

For the same reason, emails are worth a glance.  Not only do credit card companies usually send “online alerts,” such as a notification of a new statement or a payment reminder, but they can also offer some exclusive customer deals.  In September, for example, my Citibank/ AAdvantage credit card was offering bonus miles and an extra package of channels on DirecTV for customers buying the NFL Sunday Ticket; and in October customers can get 2,500 miles for joining Netflix, a better deal than just going through AA.com, which gives just 1,500 miles (and in the webpage sent to credit card members, it is unclear whether you actually have to use your Citi/AA card to take advantage of the offer).  Besides miles offers, though, every month I also receive some potentially useful coupons for the same credit card – the latest ones include 20% off at Ann Taylor, 15% off at Charles Tyrwhitt, and $10 off a $40 purchase at Origins (the latter is valid until 10/31/2009 – just use your Citi/AAdvantage card and coupon code CITIAAOCT).

And not treating your credit card emails as spam does not have to mean having your inbox clogged – many people have a “junk mail” email they check periodically.  Alternatively, if you have Gmail, you can filter your credit card emails so that they bypass your Inbox and go straight to a “credit cards” or “junk mail” folder, which you can check every month (settings > filters > create new filter, and click “Skip the Inbox”).  And regardless of how choose to arrange your email so that you get around to the offers, you may come to find that not everything you get from your credit card company is bad news.

A Peek into My Wallet, Part I

There is no right credit card for everyone – the best credit card for you will depend on how much you generally spend each month, the type of purchases you make, and what benefits are most relevant to you.  While you should definitely review other credit cards if you are looking for a new one (I found Ask Mr CreditCard to be a great place to start), here are the ones I have and why they work for me:

United Mileage Plus Student Visa – This was my first credit card.  I got it in college, and apparently it is not offered anymore.  There is no annual fee, but it only gives me one mile for every $2, half of what is given by most standard airline credit cards.  Because it is my oldest credit card, though, I still keep it to maintain my credit score, and have a monthly automatic payment for my cable bill set to it so that there is always activity on it and Chase does not close my account.

Citi Gold/ AAdvantage World MasterCard – I got this card to replace the United Visa as my primary credit card.  There is a $50 annual fee, but it gives me 1 mile per $1 I spend, so as long as I spend at least $5,000 per year, the annual fee is justified.  (The math: Considering the general standard conversion of 1 mile to 2 cents, I need to earn at least an extra 2,500 miles on this credit card every year to recuperate the $50 cost over the alternative, my United Visa card.  And if I spend $5,000 per year, I will earn 5,000 miles on American, or 2,500 more than I would have earned on United if I used my Visa card.)  And as a cardholder, I can also redeem miles at lower rates for certain domestic flights – 20,000 miles instead of the normal 25,000.

If you are interested in this card, or any other airline card, I suggest you sign up for the airline program first and wait for credit card offers to come in the mail (or at least that was the case during the better economic times).  Once I decided to get this credit card, I started checking my mail for better deals, and after 2 months I got one – it had the same terms and conditions as the offer available online, including the annual fee waiver for the first year, but with a bonus 25,000 miles for signing up (versus the 15,000 offer online)!

Discover More Credit Card – This Discover card is a really good deal as a secondary credit card.  It gives only up to 1% cash back on regular purchases – less than my Citi/American Airlines card, which, given the conversion rate, effectively gives me 2% – and is not accepted in all places, making it not-so-great to have as your sole/ primary credit card.  But every quarter it offers 5% cash back bonuses for certain purchase categories, and every so often there might be other bonuses too.  In the quarter ending this month, for example, this Discover card was giving a 5% cash back bonus on home improvement stores, department stores, and clothing stores, not to mention the bonus for restaurants in June I wrote about a few weeks ago.  And July to September, you can get a 5% cash back bonus on purchases (up to $300) at gas stations, hotels, theme parks, zoos, and bookstores.  That’s an extra $15 – not that much, but much better than the $3 you would get for spending $300 on a 1% cash back card.

5% cash back is probably one of the best deals on credit cards out there.  Having this Discover card as your secondary card, you should always remember to use it for purchases eligible for bonuses (remembering to check them every quarter), but go ahead and use your primary card for everything else (provided it gives you 1% or more in cash back).

Museum Visits, Compliments of Bank of America

Last week, I came across an article on Bank of America’s Museums on Us program, which gives free access to over 100 museums all over America during the first weekend of each month when you show your BofA active debit or credit card.  Even if there aren’t that many options in your own city, remember to check the list of participating museums when planning your next trip – the Met and the Aquarium in New York and the Museum of Fine Arts in Boston, for example, are part of the program.  It may also be a good place to start as you plan your July 4th or Labor Day weekends (both are the firsts of the month).  Be sure to check out the article and the Museums on Us website for more details.

Get the Check and 5% Back

If you have a Discover More card, make sure to sign up for the 5% Cashback Bonus on restaurants going on throughout June.  Discover had a similar bonus event in March (offering 2% cashback), but this time around I did not receive any notifications in the mail or through e-mail and found out only when I logged in to make a payment.

5% cashback is a great deal and can’t easily be found in other credit cards without annual fees (though the Citi Forward gets close for some purchases).  Unfortunately, this deal is limited to a total of $200 spent in restaurants during the month of June, or $10 in cashback.  But if you are dining out (hopefully after making a reservation through OpenTable) or ordering in (don’t forget that delivery food comes from restaurants too!) at any point during the month anyway, be sure to use your Discover Card and get as much of those 10 dollars as you can.