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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Check Again: A Look at Current Checking Account Options

After finishing a harrowing first year of graduate school, I finally have time to pick up Money Under Your Futon again. Kathy and I both had crazy (academic) years, but we are glad to be back here, learning and writing about personal finance tips for people with entry-level jobs (or stipends) who want to live the good life.

Kathy posted her “I am back” post a few weeks ago, in response to some of the craze going on over TLC’s Extreme Couponing show. As for myself, this is my “welcome back” post.

I reviewed some checking accounts a long while back and, given all of the regulatory changes in the banking system over the last year or two, I think it is time for an update. Here is a summary of the most basic checking accounts offered by some of the largest brick-and-mortar banks. While banks warned that the recent and ongoing regulatory changes might translate into the end of free checking accounts, not all of them have actually banished free checking yet. Some, such as Chase, HSBC, and Wells Fargo, have certainly delivered on the warning, putting stringent requirements on customers, who otherwise must pay up a monthly fee for their accounts. Other banks, however, have come out on top. PNC’s Free Checking does not have any monthly fees at all, while Bank of America makes it fairly easy to avoid its maintenance fee.

  • Bank of America’s eBanking account: this account is great for young, internet-savvy customers with uncomplicated finances. There is no monthly fee nor minimum balance as long as you don’t use a teller for any of your transactions. And BofA has one of the best ATMs that I know of, since the machines actually count your cash and scan your checks when you make a deposit, and the amount posts to your account immediately. If the range of your checking needs is usually limited to withdrawals and deposits, this is a great option for you. And when you do need a teller, the monthly fee is $8.95.
  • Chase Total Checking and Chase’s College Checking: the Chase Total Checking account has a monthly fee of $10 which is waived only with (a) a direct deposit for $500 or more, (b) a minimum daily balance of $1,500, or (c) an average daily balance of $5000 or more in all of your Chase deposit and investment accounts. Personally, I think this is a pretty bad deal given other options. Even if you can satisfy the requirements now, consider the worst case scenario – you don’t want to lose your job, have to deplete your account, and then also get hit with a fee. If you’re in college or grad school though, you can avoid that through the College Checking account. With this account, the $6 monthly fee is waived for 5 years while you’re in school, though after graduation you’ll need to set up a monthly direct deposit to continue the fee waiver.
  • Citibank’s Basic Checking account: there’s no minimum balance for this account, but you have to jump some hoops to avoid the $8 monthly fee. The fee is waived for every month you have 5 transactions in the account, including direct deposit, ATM withdrawals, debit card payments, and automatic payments. This may seem like an easy set of hoops to jump, since any 5 transactions in a month count, be it 5 ATM withdrawals, 2 direct deposit and 3 debit card payments, or any other combination of transactions. However, keep in mind that while on a day-to-day basis it may be easy to satisfy this requirement, it might not be the case when you go on vacation. If you travel abroad and don’t use ATMs or your debit card in a given month, you may easily come back to find a fee on your account. But perhaps $8 isn’t all that bad.
  • HSBC’s Choice Checking and Basic Banking: HSBC’s Choice Checking is a less strict version of the Chase Total Checking, also with a slightly lower fee. The $8 monthly fee can be avoided with (a) a monthly direct deposit, (b) at least $1500 in personal deposit or investment balances, or (c) at least $5000 in broader total monthly balances, which includes personal deposits, investments, and certain credit balances. On the other hand, if you don’t want to bother with the requirements or can’t meet them, HSBC also offers a Basic Banking account. With this account, you are always charged a $3 monthly fee, but at least there are (almost) no other surprises. That is, as long as you write less than 8 checks per month. If you go over that, there’s another $0.35 fee per check you write.
  • PNC’s Free Checking: this is a truly free checking account, with no minimum balance or transaction requirements. Although PNC does not have as many ATMs as other big banks, it makes up for that by reimbursing ATM fees when you use a non-PNC ATMs as long as you maintain a balance of at least $2000. As I see it, this is a great deal. If you’re going to meet a minimum daily balance, instead of just doing that to avoid a monthly fee, you might as well get something out of it. Here, PNC rewards you by making every convenient ATM a free one too.
  • U.S. Bank’s Easy Checking and Student Checking: there are two ways to avoid the $6.95 monthly fee on the Easy Checking account: (a) having direct deposits with a combined value of at least $500, or (b) maintaining an average daily balance of $1500 in the account. This is a pretty standard, middle-of-the-road account nowadays, with average requirements and an average fee as well. You could do better – but you could certainly also do worse. If you are a college or grad student, though, you may also want to look into U.S. Bank’s Student Checking account. There is no minimum balance or transaction requirement for this account, and you get reimbursed for up to 4 ATM fees a month when using a non-U.S. Bank ATM.
  • Wells Fargo Value Checking: to avoid the $5 monthly fee on this account, you must either (a) have a direct deposit of at least $250 a month, or (b) maintain an average daily balance of at least $1500. While I think one should avoid any account that requires direct deposit or minimum balances since these are the first to go when your finances go under, this checking account does have the one of the lowest monthly fees out of those reviewed here. So if you find you are going to be inevitably hit with a fee, then this might be a good option for you.

When I reviewed checking account options 2 years ago, I had PNC’S Free Checking in a close second place after a Bank of America account. This time, it’s a tie, and the breaker really depends on convenience. If BofA ATMs are convenient for you and you can’t remember the last time you actually stepped into a bank, you can’t go wrong with the eBanking account. On the other hand, if you have a PNC ATM close by or are planning to maintain a balance over $2000, PNC’s truly Free Checking is a great option – not having to ever worry about ATM fees certainly pushes it ahead.

And if you don’t have BofA or PNC ATMs nearby and cannot maintain a balance of at least $2000, think carefully before just choosing the bank closest to you. If you are just starting out and your job isn’t stable – and most aren’t nowadays – it is best to avoid accounts that have minimum balances or direct deposit requirements. The last thing you need is a bank working against you, using fees to chip away the balance you do have. Check your local banks and credit unions as well. As this review shows, despite all warnings, there are still free or almost free checking accounts out there.