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A $10,000 Secured Card Deposit? Bad Idea

Eva Norlyk Smith Ph.D.

November 12, 2012

QHi Eva,

I’m 31, and I have no credit history because I live on cash and debit cards. But I’m realizing it’s important to have a credit history and want to build one. My bank says a secured card is the way to go. I can put up to $10,000 into a collateral account and get an equal credit limit. I’m not sure putting that much into that account is a good idea, even though I have that much cash liquid. Would doing the super-high deposit and super-high credit limit give my credit-building a jump-start? Or would a smaller deposit and limit be just as good? I want to buy a house within a year. — Oscar

ADear Oscar,

OK, let’s see how I can put this nicely: The first step you might want to consider is getting a new bank. Quite frankly, any bank that offers you a secured credit card with $10,000 as collateral does not have your best interests in mind.Ask Eva

Secured credit cards can be opened with as little as $300 to secure the credit line. That will give you only a $300 credit line for most secured credit cards. Yet there are other secured credit cards that will give you a credit limit that’s higher than your deposit (assuming you qualify — otherwise they will offer you a lower credit line).

Making a high security deposit to get a high credit line will not help you more than taking out a secured card with a smaller credit limit of say $2,000 to $3,000. In fact, the bigger deposit could hurt you in the long run, because when you need that $10,000 for your mortgage down payment and withdraw your credit card deposit, you will lose your $10,000 credit limit, leaving you back at, almost, square one.

The good news for you is that there is a big difference between having a thin credit file, as it is known in the industry, and having bad credit. And there are plenty of banks looking for ways to attract customers from this huge, underbanked demographic. As a result, there are many credit options available for people with no or limited credit, and there is absolutely no need to make a sky-high deposit on a secured credit card to get a credit card.

Here are some steps you can take to help you get a credit card, build credit and increase your chances of qualifying for a mortgage.

1. Pull a free copy of your credit report. Just because you have been using cash and debit cards doesn’t mean that you don’t have any credit history at all. If you have a car loan or have ever taken out any other kind of loan, there will be a credit record in your name.

You can get free copies of your credit reports from the three major credit bureaus (TransUnion, Experian and Equifax) at AnnualCreditReport.com once a year. Be sure to pull your reports from all three bureaus and check for the accuracy of the information.

2. Get your FICO score. Next, get a copy of your credit scores to find out where you’re at and establish a benchmark to monitor progress. Unlike with credit reports, you have to pay to get your credit scores. Each of the credit rating agencies offers its own proprietary credit score, but be sure to get your FICO score at myFICO.com, which is what mortgage lenders look at. If you prefer, you can also estimate your FICO score using this free FICO score calculator.

3. Apply online for a credit card for people with no credit. Terms for credit cards vary tremendously, and you are likely to find the best deal by shopping around among different card offerings. Many credit card comparison websites sort credit cards by credit required, including credit cards for people with no credit. This makes it much easier to compare offerings and make sure you get the best deal.

You may be able to get a regular bank credit card, so start applying for that and only try for a secured credit card as a fall-back strategy. For example, check out the Capital One Cash Rewards for Newcomers card, which also gives between 1 percent and 2 percent cash back on purchases. If it turns out that you do need a secured credit card, check out the Capital One Secured MasterCard — you might qualify for a credit line of up to $3,000 for a security deposit as low as $200.

4. Start a relationship with a bank. Local banks or credit unions can be a great source of mortgage loans. If you have an established relationship with them, they will sometimes be able to approve you for a mortgage loan earlier than you’d get approved on the national market. Ask around to find banks or credit unions in your area that other people have had good experiences with. Then open a checking or savings account and deposit your $10,000 in that account.

5. Consider applying for a car loan or small consumer loan. FICO scores reward consumers for having many different types of credit. The idea is that if you can manage regular payments on numerous credit lines, you have the discipline and financial wherewithal to be trusted with larger amounts of credit down the road.

Once you have established these accounts, you’re well on your way to a great credit score. Simply pay all bills on time, not just your credit card bill. Keep balances on your credit card low, and pay off the balance in full each month. With these steps, it’s only a matter of time before you will see that FICO score climb up. In the meantime, you’ll have that $10,000 sitting in your own bank account earning interest.

Got a question for Eva? Send her an email.