Editorial Policy

Maximize your very first credit card

Erica Sandberg

March 11, 2014

QHi Erica,

I am just starting with my first credit card, and I want to have a good credit score. The one I have is a secured card, $500 limit. Does my credit score go down because the card is secured and with a bank that no one has heard of? I told my girlfriend I got a card with them and she said, “What? Who are they? You're crazy.” Uh, thanks.

Now I feel dumb. I want to work my way up to a real bank with no money down. The annual fee for this card is $50 and the APR is 19.9 percent on purchases and cash advances. Can I do better, or should I stay with them and for how long? I haven't used it yet because I'm not sure if I should keep it. –Tomas

ADear Tomas,

Kindly tell your girlfriend to hush. There are plenty of “real” smaller banks that issue genuine secured and unsecured credit cards. The account you have right now should be fine. With it, you can build a great credit history. And once you do, you'll be positioned to qualify for even better products. However, to be absolutely sure you've got the right card, call the issuer and ask if it reports the card's activity to the credit bureaus. If it doesn't, then you should cancel the card and apply for one that does report payment activity to the big three credit bureaus — otherwise you are just wasting time and money.Ask Erica

So, does the fact that the account is secured matter to a credit score, such as the FICO? No. Scores are not downgraded because credit card is collateralized. Nor are they affected by the particular bank that issued the card. They don't rate banks; they rate actions.

That means you have to use the credit card in order to develop a credit score. The account should appear on your credit report, but until you charge with it, only the basics are recorded, such as the date it was issued and the amount of the credit line.

Because credit scores rate activity, get cracking! Choose a small expense to charge every month, and pay it off by the due date. Consider setting up an automatic, recurring payment to keep the card active. The issuer should notify the credit bureaus of your actions, which will list that data. FICO scores will begin to be generated. After about a year of constant and responsible behavior, your scores will rise like the sun. Why? Because you are demonstrating that you can borrow money and pay it back, which is what lenders most want to know.

As for your card's terms, the annual fee isn't terrible, so I wouldn't worry about that. However, the APR is on the high side. That's normal because you are an unknown entity, and therefore a risky customer. You haven't proven yourself as a credit master yet, even with the cash that the bank can claim from the deposit account in case you default., hence, the poor rate. No matter. Just don't roll over balances that would be increased by the expensive finance fees. Shun the minimum payment you see on your statement and send the entire balance instead. That way, the APR, regardless of how high it is, will be inconsequential.

When you have 12 months of perfect payments listed on your report and factored into your score, you can try for a different card. Either ask your current bank to turn your secured card into an unsecured product (and get your deposit back) with a higher credit line, or offer your business to another issuer. There are plenty to choose from..

Whatever you do, keep the initial card after you get a new one, at least in the beginning. This way you can increase your credit rating further, as having a variety of well-managed accounts will boost those numbers. Then you'll be more eligible for famous label cards with no annual fees, low APRs and lucrative rewards programs. At that point — which won't be long if you follow my instructions — you can show your darling friend just how sane and smart you truly are.

Got a question for Erica? Send her an email.