Creating financial independence is a priority for college students and new graduates. It can be difficult to qualify for a credit card if you don’t have a credit history of your own, but it’s essential to do so if you want to be able to do things like buy a home or a new car.
Many of our CFE members come to us with questions about how to build or improve their credit. One of the things we tell them is that getting a secured credit card can help. Here are our best secured credit card tips to help you become financially independent.
Understand What a Secured Credit Card Is
A secured credit card is a card that requires the cardholder to make a deposit that serves as cash collateral against the credit limit. The deposit amount is equal to the credit limit, so if you make a deposit of $300, you will have a credit limit of $300.
Secured credit cards are a good way for people with no credit history to build their credit. The deposit eliminates the risk to the card issuer. If you fail to make a payment, the company that issued the card can simply take the balance due from your deposit.
Make Sure the Card You Choose Reports Good Behavior
When you have an unsecured credit card, the card issuer notifies the major credit bureaus when you make payments on time. Those reports help to build your credit score, since timely payments are a major component of your score. The same is not always true of companies that issue secured credit cards.
Before you apply for a secured credit card, check to see if the card issuer will report your payments. If they don’t, then keep looking until you find a card that will.
Will Your Limit Be Equal to Your Deposit?
Next, ask if the amount you deposit will be the same as your credit limit. In the past, it was sometimes possible to get a credit limit that was more than the amount of your deposit. For example, you might be able to deposit $200 and get a $300 limit.
Nowadays, you will most likely be required to deposit 100% of your limit. You should also ask what limits are available. For building your credit, you should stick to a small amount to start. You can always make an additional deposit later to increase your limit – or you may be able to qualify for an unsecured card if you make your payments on time.
Check the Fee Schedule
Fee schedules can vary greatly from card to card, so it’s always a good idea to ask to see a complete fee schedule. The interest rate is only one of the fees you may be charged. You don’t want to be surprised by additional fees.
The Credit Card Act of 2009 prohibits financial institutions from charging fees that total more than 25% of your card’s limit in the first year. Review the fee schedule and calculate what your fees will be to make sure they’re not too high. At the same time, evaluate the fees to see whether the card is worth having. Some secured credit cards charge a monthly or annual fee in addition to interest.
Change the Due Date if Necessary
A mistake that a lot of first-time cardholders make is failing to ask about the due date for their credit card payments. If you get paid every other week, or once a month, it makes sense to ask for a due date that aligns with your pay dates.
Some card issuers may act as though the due date is carved in stone, but keep in mind that they want your business. It’s reasonable to ask for a due date that will allow you to make your payments on time. Also, credit card companies are prohibited from naming a due date that’s fewer than 21 days from when they send the bill.
Make Your Payments on Time
The deposit that secures your credit card is held in a separate account. The card issuer won’t touch it unless you default on your bill. For that reason, it’s important to pay your bill on time each month. Some cardholders make the mistake of assuming their payments will be withdrawn from their deposit, but that’s not the way it works.
Making your payments on time each month will help you build your credit. Over time, you may be able to qualify for an unsecured credit card with the same company. If you do, the company will return your deposit to you.
If you’re working to establish your financial independence and build your credit, then applying for a secured credit card can help you reach your goals.
To learn about CFE’s credit cards, please click here now.