If you have no credit history, it can be hard to do adult things like get a mortgage, negotiate insurance rates or even rent a bigger apartment.
The easiest place to start building good credit is with a credit card. But how do you qualify for a credit card with no credit?
That’s a problem many consumers face, as an estimated 26 million people in the United States are considered “credit invisible” — meaning they don’t have any credit record — and another 19 million Americans are considered “unscoreable” because their credit information is insufficient or outdated, according to the Federal Reserve Bank of Philadelphia.
If you’re among that group — or you have poor credit in need of rebuilding — a secured credit card may be the route for you. Here’s what you need to know.
What Is a Secured Credit Card?
A secured credit card is a great way to rebuild if you have bad credit or no credit at all. It works much like a traditional credit card, except with one big exception: a secured credit card’s credit limit is based on a refundable security deposit rather than your credit worthiness. We’ll explain.
How Do Secured Credit Cards Work?
When you apply for a secured credit card, you’ll put a deposit down as collateral, and the bank gives you a credit card with a limit that’s typically approximately the same amount as your deposit. The bank essentially uses your deposit as your line of credit.
So if you put $200 down, your credit line on most secured cards will be $200. Keep in mind that once you deposit that cash, you generally can’t get that cash back until you cancel the card, so make sure you don’t need that money any time soon.
Make a Secured Credit Card Work for You and Your Credit Score
Like an unsecured credit card, a secured credit card charges interest, so you still need to make monthly payments on time and in full to avoid fees.
To make your secured credit card work in your credit score’s favor, you need to know what a credit score is and follow some simple rules:
Pay your bills by the due date every month.
Keep your credit utilization below 30% of your credit limit.
Don’t open multiple cards at one time.
How Does a Secured Credit Card Build Your Credit Score?
The point of getting a secured credit card is to help create a positive payment history, which helps with credit building.
The credit card issuer reports your activity to at least one of the major credit bureaus — TransUnion, Experian and Equifax — which is used to calculate a credit score, i.e. your VantageScore or FICO score. So after using and paying your card off for a while, your credit history and score will grow.
If you’re receiving card offers in the mail, double check that the application is for a secured credit card rather than a prepaid debit card, which will not help you build your credit score.
When Matthew Ramachandran was 18, he put a $400 deposit on a Bank of America secured credit card — that helped him grow his nonexistent credit score to a 700 in eight months.
Asked about his tips for building credit by using secured credit cards, Ramachandran said, “I always used less than 30% of my credit limit.”
After hitting that 700 credit score, he canceled the secured card and got approved for an unsecured Chase Visa with travel rewards. Now he now makes business purchases with unsecured cards to get travel rewards. He even stayed at the Ritz-Carlton in Hawaii for five nights with his points.
All thanks to that first secured credit card.
How to Get a Secured Credit Card
You can visit a bank or apply online. If you’re a credit union member, you may want to check there first because they often offer lower interest rates and waive annual fees.
If you have a bankruptcy on your record or a history of missed payments, the bank may not approve you for a secured credit card. If you’re denied, you have a legal right to know why. You can contact the card issuer for that information.
Ease into credit cards by asking a financially responsible family member to add you as an authorized user.
If you find that the card issuer rejected your application due to an error on your credit report, you can — and should — dispute the error with the credit bureaus. Once the issue is resolved, you can contact the card issuer to reapply.
How Much Will a Secured Credit Card Help My Credit Score?
There’s no hard-and-fast rule on how to use a secured credit card to build credit. The key is to keep usage low and pay off your balance in full every month.
Card issuers want to keep you as a customer, so they’ll usually offer you an unsecured card if you’ve made about a year’s worth of on-time payments.
Jen Smith is a former staff writer at Codetic.