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How to Make the Most Out of a Secured Card

Erica Sandberg

January 20, 2012

qDear Erica,

I just got my first credit card. It’s from Capital One, and they are holding my $49 so I can have a $200 credit. I know that’s not much, but I’m really excited anyway. I do not want to get into trouble like everyone else. Do you have any advice for me? — Amanda

aHi Amanda,

Nice job on getting a new credit account! From your description, I gather that it’s a secured credit card, which is great. I usually recommend them to people who are either just starting out or who need to start over. Because they are collateralized, they’re far easier to qualify for than those that aren’t. As you’ve discovered, by leaving just a small amount of money at the bank for safekeeping, they agree to let you borrow from them using the credit card. Their risk in giving you credit is minimal, since they can claim your deposit if you fail to pay your bill, and you get to enjoy the benefits of charging.

Out of curiosity, I conducted a little research about which credit product you might be holding. I believe it’s the one that has an annual fee of $29, and an APR of 22.9 percent on purchases and 24.9 percent on cash advances. Assuming this is the case, the yearly cost to have the card is reasonable, but the interest rate is on the high side. While normal for a credit newcomer, it will make rolling any unpaid balances over to the next month (which you should not be doing anyway) rather expensive.

Here’s what I’d like you to do:

1. Charge a couple times a month. You can’t establish a credit history without charging, so use the card occasionally on things that you can afford. For example, before charging $60 at the supermarket, first make sure that you’ll have that sum available in your checking account when the bill comes in.Ask Erica

2. Think before you swipe. Before whipping out the card again, conduct a brief run-though of the amount that you may already owe. So if you charged those groceries, but want to buy concert tickets for $45, ask yourself if you really will have the $105 ready to send in 30 days. If the answer is no, put the plastic back and watch the show on YouTube instead.

3. Eschew cash advances. Unlike with purchases, there is no interest-free grace period when taking cash from your account. The finance charges kick in immediately. Worse, you’ll also be assessed a fee equal to 3 percent of the advance, which will be at least $10. Don’t do it.

4. Be prompt. If you pay late, the credit card company will charge you a fee. For the account you seem to have, that will be $19. Unless you enjoy lighting a $20 bill on fire, honor thy due date.

5. Know that “they” are watching. Everything you do with the card will end up on your consumer credit reports. Who’s looking? Everyone with a legitimate business need, including future landlords, employers and lenders. They want to see how you’ve borrowed and repaid, so keep your reports pristine. This means following the above advice: carry no debt and make every payment on time.

That’s it. Charge this way, and you’ll avoid the anxiety and financial problems that you’re (rightly) so fearful of. Also, when you’ve used the credit card the right way for a full year, you can venture out and get a different type of card — one that’s unsecured and that has a grander spending limit, lower interest rates and fees and, possibly, even a rewards program.