Using a Secured Credit Card to Build Credit
Credit is sadly a necessary part of modern life in the US. I used a secured credit card to build credit, and I recommend it highly.
What Is Credit and What Is It Used For?
Credit is about borrowing money.
Since borrowing is all about trust, in the US we have a system for demonstrating trustworthiness to institutions. They read your debt history in the form of your credit report and your credit score.
For a good introductory look at what credit is – and how to build credit – I shall call to your attention this article from BGR:
In brief, you want to build up a proven history of reliability to bolster your credit score. You do so by consistently paying off debts, and by having access to credit for a while.
If you do build credit, you will find it easier to get cheaper loans for cars and homes and other large purchases that require loans.
Credit is also important if you're a renter, as it's one of the standard metrics to check during applications (alongside criminal history and rental history).
Credit is also a useful tool for managing cash flow. I keep a notably shallow reserve of operating funds and instead rely on my multiple incomes and a line of credit to float through each month.
Credit is just a tool – albeit a double-edged one that is sharp enough to get you deep into debt if you're not disciplined enough to wield it.
It's important to note that credit cards in particular should be paid off in full every month, barring emergencies that you need to carry a balance on.
How Do Secured Credit Cards Work?
Secured credit cards are straightforward: you put down a security, for instance $1000, and in return you get a credit card.
That credit card's limit depends on the issuer, but it can be less than or greater than the security, for instance $800 or $1250. If you don't pay back your credit card, the lender keeps your security. You can get that security deposit back, usually after you close the card.
Thanks to the secured aspect of putting cash at stake, it's relatively easy to obtain a secured credit card. Especially if you have no credit history, or are recovering from a bad bout in credit history.
As such, secured cards are a straightforward tool for building credit from nothing.
Though it is worth warning: not all secured credit cards will report to the credit bureaus. Be sure to research whether your prospective cards do or not, if your goal is to build credit.
Secured vs Unsecured Credit Card
Now that we know about secured credit cards, you may be asking "What is an unsecured credit card?"
Unsecured credit cards are the standard card most people think of. They have no collateral/security for the issuer to claim if you skip paying back what you borrowed.
There are some key differences, and some key similarities.
For one thing, both secured and unsecured credit cards are reported to the big bureaus. They're both accepted widely as payment.
Secured credit cards typically have a low limit, and it's nearly always based on how much you deposit. Unsecured cards can have tens of thousands of dollars as their credit limit, depending on your credit score and history.
Unsecured cards also often try to sweeten the deal and encourage spending by offering rewards. Rewards like cash-back, travel points, and so on.
Secured Credit Cards Are Great For Starting Out
I started my credit history with a secured credit card.
I spent several years with just a debit card, scornful of the credit game – and as a broke college student I lacked income to justify getting a credit card.
Years passed and then came the preparations for our first house hunt. I needed a credit score if I wanted to be involved in the finances, so I sought out a secured credit card.
My credit union offered secured cards, so I applied for one online and went through the process to get one.
If you are interested in getting started with credit cards like so, I shall call to your attention yet another BGR article:
In summary, how to build credit with secured credit cards is simple: get one that reports to a credit bureau, use it a little bit each month, and then pay it off in full every month.
Getting a secured credit card is one of those useful things you do when you're starting out and launching your personal finances.
There's fanatical portions of the personal finance community that believe all debt is evil, and that credit cards are a trap – they're mistaken in their oversimplification.
Credit cards are a versatile and useful tool, acting as a shock-absorber for cash flow. A good card will also offer rewards for using it that are relevant to you, such as cash-back in my case.
However, impulsive spenders should be wary of credit cards due to the risk of going into credit card debt. The rates on credit cards are predatory at best, and there are countless stories of people being crushed by their spending once they amass large enough debt.
Credit cards need financial discipline to use effectively. You need to know how much precisely you can spend safely, so that you avoid overspending.
To that end, I recommend monitoring your cash flow every month: