Secured credit cards are easy to get and help build your credit
score
As we have pointed out before, establishing credit can be
tricky if you do not already have credit. The first thing any
lender wants to do when you apply for an account is to check
your credit report. And if you have no credit, there will not be
anything on the report that suggests that you are worthy of any.
It's a classic "Catch 22" situation. What can you do?
There are several solutions, but the best of them is for you to
establish an account with a company that offers a secured credit
card. Like the name suggests, such a card is "secured' by cash
collateral. When you open your account, you will provide the
lender with a cash deposit. This money will be placed into an
interest bearing account in your name and as long as you have
the card, the money will be held there.
Your card will be issued to you with an available limit that
does not exceed the amount of the deposit. In some cases, the
limit will be as little as half of the deposit amount, but more
often than not, you will be granted a limit of close to the
total deposit amount.
(These cards differ from prepaid credit cards, where there is no
bank account that secures the card. With prepaid cards, the
money is actually "loaded" onto the card itself. Your card has a
limit of however much cash you gave them when you purchased the
card. These cards may be "reloaded" for repeated use, but they
are generally considered to be debit cards and do not help you
establish a credit history, although there are some exceptions
to this.)
Having applied and put up a deposit to secure the account, you
will have a credit card that you may use just as anyone else
might use one. The card is otherwise indistinguishable from any
other "normal" credit card. You will receive monthly bills, and
as long as you pay them on time, you will be earning credit in
your name and building your FICO credit score. You may continue
to use this card for as long as you like, but at some point you
will probably want to try to obtain an unsecured credit card.
Unsecured credit cards tend to have lower interest rates than do
secured cards. Plus they are less likely to include an annual
fee for their use. And of course, they don't tie up some of your
cash in a bank account that you cannot touch. For anyone who
needs to establish credit, a secured card is the way to go, but
you do not want to keep using one any longer than is absolutely
necessary. They are just too expensive.