Updated April 3, 2017
In 2008 (bad timing), I moved to the US with my wife, Margarita, after living in Moscow, Russia working for Citibank. She was not a US citizen, and had no credit history or credit score. Being without a credit score in the US basically means you don’t exist! So, we had to fix that fast. Within 12 months, she had a very good credit score. And within 18 months, she had an excellent credit score. In this post, I will explain:
- How Margarita (and you) can open a secured credit card
- How to use a secured credit card (to maximize the boost in your score)
- How to select the best secured credit card. Our favorite card is from Discover (learn more and apply on Discover’s website). It charges no annual fee, you can earn cash back and we review it in more detail below.
How To Open A Secured Credit Card
Opening a secured credit card is relatively easy. You have to provide the bank with a deposit, which is typically $200 or more. The bank will keep the deposit as collateral and will provide you with a credit limit equal to your deposit. In Margarita’s example, she gave the bank a $500 deposit and received a $500 credit limit.
Once open, the credit card works like any other. Your credit limit, balance and payment information is reported to the credit bureau. The only difference: if you fail to pay your credit card on time, the bank can take your deposit and apply it towards the debt.
So – the bank has a guarantee that they won’t lose money. And you have the opportunity to prove that you will use your credit wisely.
How To Use A Secured Credit Card
Given that I was a bank credit risk manager at the time, I knew a bit about credit scoring. So, I made sure Margarita followed this strategy:
She used the card every month, but for a very small amount. Her typical monthly bill would be around $10.
She made sure that she paid the balance in full and on time every month by signing up for automatic payments.
She subscribed to a credit scoring service to watch her score improve over time.
It took about 6 months for Margarita’s score to cross the 600 threshold. About 18 months after starting, she had a score well above 700. At that point, she applied for a rewards credit card. It had a great sign-on bonus and a frighteningly high $25,000 credit limit.
So, it only took a year and a half for someone to go from being a credit nobody to one of the most sought after customers in the country. What was the trick? It is actually very simple.
Once a secured credit card is open, you want to follow the three key rules:
- Make sure you use the credit card every month. You can only build a credit score if you have activity on your credit report.
- Keep your utilization low – preferably below 10%.
- Make sure you pay your bill in full and on time every month.
Use Your Card Every Month
In order to have a FICO score, you must have activity on your credit report in the last six months. If there is no activity on your report in the last six months, you cannot get a score.
Activity does not mean you need to go into debt. You can make a single purchase every month (even for just $1) and that is considered activity.
Keep Your Utilization Low
One of the most important components of your credit score is utilization. Your utilization is calculated by dividing your statement balance by your available credit. People with the best credit scores have utilization levels of 10% or less. That means if you have a credit limit of $1,000 you should not spend more than $100 a month.
The best strategy with a secured credit card is to select one small, recurring transaction and automate it. For example, use your secured credit card for your monthly Netflix bill.
Pay You Bill In Full And On Time Every Month
The most important part of your credit score is a history of on-time payments. Even a single missed payment can have a very negative impact on your score. The best way to ensure that you don’t miss a payment is to set up automated monthly payments.
And make sure you pay your balance in full. If you pay the balance in full, you will not have to pay interest. And there is nothing more ridiculous than paying interest on a secured credit card. Remember: your credit limit is equal to your deposit. You are literally borrowing your own money. But if you pay interest (at a high rate), you will be paying a bank to borrow from yourself.
This is just a long way of saying that Margarita’s approach worked. If you want to use a secured credit card to build your credit score, just use it every month for a $10 charge. And pay that balance in full and on time. Your score will improve quickly.
How To Select The Best Secured Credit Card
When selecting a secured credit card, we recommend that you focus on the annual fee (you shouldn’t have to pay one). You can find our round-up of the best secured cards here. You will see that our top choice is from Discover.
Discover’s card has no annual fee. You will have to make a deposit of at least $200, and the credit limit will be based upon your deposit. What we like most is the automated review process to upgrade your account. After just seven months, Discover will review your account every month. As soon as your credit score is good enough for a traditional card, you will be converted automatically. Discover will refund your initial deposit and graduate you to a standard credit card.
You will also have the opportunity to earn rewards on your secured card. You will be able to earn 2% cash back at restaurants and gas stations, on up to $1,000 of purchases each quarter. All other purchases get 1% cash back. You can learn more and apply by clicking the link below.
Margarita had opened a secured credit card with Bank of America. There was an annual fee, and migrating from the secured to the standard credit card was painful. But, in the end, it worked. If you use a secured credit card wisely, you will not have it for long. So even if you don’t use one of our favorites, we still highly recommend your follow our strategy on any secured credit card – and you should get a good result.