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How a starter card helps build credit scores

Erica Sandberg

November 3, 2015

QHi Erica,

Does it matter what kind of credit card you get? For your credit, I mean. Like, if I got a secured card with a $200 limit, is that the same on my credit as a real card with a much, much bigger limit? I already tried for the real card and was turned down, but I can get a secured card today that will be my first card. But if it is not good for my credit, I won't. — Jayce


ADear Jayce,

No worries! If you manage most kinds of credit products responsibly, that positive activity will show up on your consumer credit reports (there are three: TransUnion, Experian and Equifax) and your credit scores will eventually benefit.

Although there are others, FICO is the most commonly used scoring system, and it does not differentiate between an account guaranteed by cash and one that isn't. As long as you have a job, I encourage you to apply. Everyone has to start somewhere, and a secured card is a perfect way to begin. To qualify, issuers usually require only an income and a few hundred dollars that will act as collateral. That money is held in a separate account, and it should be fully refunded when you close the card with no balance remaining, providing there are no outstanding fees. Your credit line probably will be equal to the amount you put down, but some issuers offer a little extra borrowing power.Ask Erica

Evidence of the card will show up on your credit reports (available for free annually at AnnualCreditReport.com), but your credit reports will not indicate the amount the issuer is holding for you. What the issuer will report to the agencies are other card details, such as when you opened the account and how much you're able to charge (the credit limit).

After that, it's up to you to make sure the activity that's reported is positive, because in about six months, you'll have enough information on your reports for a score to be calculated.

FICO assesses five general factors.

In order of most to least important, here are the five factors that form your credit score:

  • 35 percent payment history: A few weeks after getting the card, you will receive a bill for what you charged, with a due date for when payment is expected. Honor it! If you don't trust yourself to be on schedule, set up automatic payments with your bank.
  • 30 percent credit utilization: There's no sense having a credit card if you don't use it, but borrow only what you can and will repay in full. Not only is keeping your balance well below your credit limit good for your scores, but it will keep you out of expensive debt. Keep your monthly charges well below your available credit line — meaning don't max the card out every month! This is your credit utilization. And don't carry over large balances from month to month.
  • 15 percent length of credit history: The longer you've had and used credit the better, so if a positive credit score is your aim, don't delay.
  • 10 percent types of credit: Eventually you may want to apply for another credit card or take out a loan. If you do, your credit rating will improve because you'll be able to show that you can handle a variety of different credit products.
  • 10 percent pursuit of new credit: Of course, to obtain a credit card you'll have to apply, but go slowly. Too many applications in too short a time span will indicate desperation — and that will reflect negatively on your scores.

If all this sounds complicated, relax and simply focus on the first two factors. They make up the bulk of your score, so if you use that secured card frequently but always pay on time and never carry over debt, your scores will climb. Check your credit scores every so often (you can get your credit score from MyFICO.com for about $20 each) to track your progress. The numbers start at 300 and go up to 850. Anything in the mid-700s is an indicator that you're a low risk — and, therefore, a high-value — customer.

Got a question for Erica? Send her an email.

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