When I was in college, my focus was on my studies and of course, my social life. College was a ton of fun, but I also made sure that I never took my eye off the prize – namely, graduating with decent grades. But never did I think about building credit.
Little did I know that having good credit – or any credit at all – is essential to getting a car loan, landing an apartment, and even getting a cell phone contract. It wasn’t until I got my diploma that I realized how compromised my situation was just because I had no credit to my name.
And how was I supposed to have any credit, anyway? I had never had a loan or taken out a credit card. So, how was I supposed to build credit now that I needed an apartment and a car?
Luckily, I had my folks to fall back on as far as a place to live and having a ride was concerned, but I knew that I had to do something to start building credit, and fast. At some point in the future, I knew I would want to be able to take out a traditional credit card, take out a car loan, and even buy a house. But without solid credit, that wasn’t going to happen.
I did a little research and discovered a strategy that’s geared toward helping people in the same or similar situations – college grads with no credit – build credit, and build it the right way. The strategy? I used secured credit cards to build my credit.
What Are Secured Credit Cards?
I didn’t have the financial strength back then to get approved for a traditional credit card, so I looked into secured credit cards instead. Basically, secured credit cards require a cash deposit that is used as collateral. Whatever amount is used as a deposit is essentially the credit line for the account. For instance, I put $500 in my account, which meant I was able to spend up to that $500 limit.
Secured credit cards are made for people who don’t have any credit at all, which was exactly the position I was in when I graduated from college. By using these cards responsibly over time, I was able to gradually build up good credit. I was even eventually able to add more to that initial deposit to extend my credit because of my habit of repaying my debt on time. In fact, the bank even let me add to my credit line without requiring additional deposits.
Secured credit cards differ from conventional unsecured credit cards in that the latter do not require a security deposit. That means there is no collateral associated with the credit card. In order to get approved for one of these cards, I had to establish some credit in the first place and prove that I was able to be responsible enough to make payments as necessary. Having a secured credit card helped me do just that.
How Do Secured Credit Cards Help to Build Credit?
Using a secured credit card can be a great way to establish a good credit history. That said, you need to make sure you use it responsibly. I wasn’t going to take out a secured credit card just to start being irresponsible with it. Doing so would definitely help me establish credit, but not in the way I wanted.
Here are some things I did with the secured credit card that helped me build good credit:
Make payments on time – Payment history has the biggest impact on credit. Not making payments on time or missing payments altogether will have a negative impact on your score. Not only that, you should make an effort to make your payments in full rather than just making minimum payments. If you’re going to take out a secured credit card, make sure you’ve got the financial means to make your payments, or else don’t even bother.
Use a small portion of the available credit – There’s something called “credit utilization” that plays a key role in your credit score. Basically, credit utilization refers to the amount of money you spend on your credit card relative to your credit limit.
For example, if I had spent my entire $500 limit on a regular basis, my credit utilization rate would be as high as it gets. On the other hand, I only spent no more than $200 every billing cycle, which means my credit utilization rate was low. By keeping this up, my credit score was positively affected.
Take out the right secured credit card for you – Before I applied for a secured credit card, I looked around at the different products that were offered. Most secured credit cards are pretty good and are able to help you build credit if you are responsible with your expenditures and payments. But they each come with their own perks.
For instance, some might be best for those who can only make low deposits or have no bank account. Others offer more rewards, lower fees, and lower interest rates. You’d be well advised to shop around for a secured credit card before applying for one to make it work better for you.
Use the credit card every month – Once you take out a secured credit card, use it. Don’t let it become idle. The only way to build good credit is by using it to your advantage and ensuring that there is activity on the card. After taking my secured credit card out, I made sure to use it a little bit every month, even on the smallest expenditures. I even used it to buy my morning coffee! And since I was collecting points, using it instead of cash just made sense for me.
Stick with a low credit limit – The higher your credit limit, the more tempted you’ll be to spend what you have available to you. Credit cards might be great for building credit, but they can also be dangerous if they are not used properly.
When you first take out a card like this, you’ll probably find yourself tempted to have a high credit limit. But when you’re just starting out, you might want to keep your credit limit on the low end. Otherwise, you could risk getting out of control with your spending. In my case, for example, I never went any higher than $500 for six months.
Don’t take out too many cards – You might be tempted to apply for several credit cards considering how they’re able to help you build credit. The problem with having too many credit cards is that it won’t reflect very well on your credit report. While you can always cancel cards in the futures, canceled cards will show up on your credit report. So don’t even bother applying.
Just stick with one credit card with a low-interest rate and no annual fees when building your credit. You really only need one card, so use that one to best of your ability.
Once you’ve managed to use your secured credit card responsibly, you should be able to apply and get approved for a traditional unsecured credit card in as little as six months. In fact, I applied for a traditional credit card after less than a year of using my secured credit card to my advantage. I was then able to get an unsecured credit card in my name without having to rely on my parents to co-sign.
Not only that, but I was also easily able to snag an apartment and get a car loan all on my own thanks to the credit I was able to develop through the responsible and effective use of my secured credit card.