Editorial Policy

A secured card is a smart start for those new to credit

Erica Sandberg

February 3, 2016

Q Hi Erica,

I never paid any bills or rent to companies. I lived in a dorm in college where my dad paid the bills. After college (now), I lived with roommates and gave the leaseholder cash for my part of the rent. I never had a single credit card or loan. I have a good job (tech sales). I need a credit card, but I am an invisible man. My dad said he won't co-sign for me. Now what? — Jordon

A Dear Jordon,

First, give your father a big hug and a hearty thanks! He surely spent a massive amount of money providing you with a higher education while also keeping you housed, fed and safe. Rather than graduate in the hole (the average student loan debt today is $29,000 for an undergrad degree), you're on financially strong ground since you have a job (and even better if you have money in the bank).

I understand why your dad has opted out of sharing a credit card with you. He is probably protecting his credit rating. By co-signing, the account would appear on his consumer credit reports (as well as yours, of course), and it would be factored into his credit scores. If he has taken pains to build up high scores, he wouldn't want to jeopardize them. Moreover, he would be guaranteeing the account, which means he would have to cover any debt if you overcharged and underpaid. I'm not implying you would do this, but not everyone is comfortable with the added responsibility and liability that comes with sharing a card.

Another potential reason for him not to want to help you: He wants you to be independent. Take it as a compliment. He trusts you to act as an adult.

Though you may feel you're in a tough spot, you're not. You're working in a strong industry and have a steady paycheck. What you do not have is a positive, established credit history. If you did, that credit history plus your income would be enough to qualify you for your own unsecured credit card.

Since you don't have that credit history, a secured card is for you. I promote these products quite a lot because they are a great way to enter the credit system.

Secured cards have a refundable cash deposit as collateral. Many financial institutions offer them. To qualify, all you need is a steady job.

The credit lines for secured cards are usually low — around $500 — and most issuers require a deposit equal to the credit limit, though some hybrid accounts offer a higher credit line. Check out the current array of offers for secured cards, then apply for one.

After you're approved, the card will appear on your credit reports, but you won't have a credit score until you've used it for six months. That's because a traceable credit history is necessary to create an accurate predictive score.

To ensure you develop a good score, use the credit card the right way, from the moment you receive it. Here are the steps:

1. Choose a small expense to charge. Health club memberships are perfect. The fee is usually under $100, which is less than the typical secured card credit limit. The gym will charge your card on a fixed date, every month.

2. Automate your payment. Using your bank's bill pay system, have that sum deducted from your checking account a couple of days after the dues are paid with your card.

3. Don't use the card for anything else for six months. Use your debit card for other purchases instead. Consider this time your credit training period — you're getting into the habit of borrowing and repaying responsibly.

4. Keep track by checking your statements. You want to be sure the payments are posted correctly. They should be, but it's always smart to check.

This simple system will ensure that you hit the most important credit scoring goals: a spotless payment history and proper credit utilization.

No longer will you be the invisible man. Your credit reports will reflect your positive repayment activity. You may even want to pull a copy of your credit report for free at annualcreditreport.com and show it to your dad. I bet he'll be proud.

Once your credit scores reach 700, you can start looking for an unsecured card. Don't cancel your secured card until you have a couple of other accounts in your billfold. Only then should you close the card and get your deposit back.

Got a question for Erica? Send her an email.

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