Secured Credit Cards & Secured Loans Can Help Build Your Credit History

August 24, 2008

Secured credit cards and secured loans are an alternative to signing up for a regular credit card in order to build your credit history.  I recently received the email below from a reader who is a recent college graduate and is looking to build up her credit history so she can buy a home in the future.

I’ve recently graduated from college with two degrees, no loans, no debt, but no credit. I didn’t take out a credit card in college. You posted about cards for college kids and I saw an old post about cards for grads and young professionals (who’ve already established credit in college).

I’m single with no dependents. I’m working full time and bringing in a steady income. I’m used to living simply and paying with cash-so I’m not swipe-happy. I realize that this helped me to learn how to budget, live with less, and stay debt free, but I want to buy a home someday.

Are there any cards out there for people who are just trying to establish credit as young professionals? I’ve been looking on bank rate, but I’m overwhelmed. What kind of card should I be looking for? I think that I fall in the gap between your two posts. I have an income, but no credit history.

The point of establishing a credit history is to prove that when you borrow money you’ll pay it back.  One popular way to borrow money is to sign up for a credit card where you’re pre-approved to spend a certain amount of money.  You agree to pay that money back within a certain amount of time or the credit card company will charge you interest on the balance you owe.

Managing Risk
The credit card company is taking on risk by lending to you using a typical credit card and will require some form of proof that you’re likely to pay back the money you borrow.  If you don’t have a prior credit history, a credit card company probably won’t want to give you a typical card but there are ways you can reduce the risk to the lender to the point where they’re willing to lend you money.

Secured Credit Cards
When you signup for a secured credit card you place a deposit with the credit card company and they give you a card with a spending limit based on the amount of your deposit.  You’re reducing the risk of lending to you by providing collateral for the money you borrow.

The credit card company will report the card details to the credit reporting agencies so make sure you pay your bills in full and on time to build up your credit profile.  Here are some of the secured credit cards you can sign up for to help build your credit history:


The Bank of America Secured Visa Card has a little lower annual fee than the Orchard Bank Mastercard Secured, $29, but a higher APR. This card doesn’t have an application  fee and also offers online banking.  The Secured Visa Card requires a minimum deposit of $300 into a Bank of America security deposit account.

Secured Card Tips
Some things to consider when looking for a secured card are the annual fee, the minimum deposit, the APR, and whether the company you’re working with reports your payment history to Equifax, Experian, or TransUnion.  If they don’t let the credit bureaus know you’ve been paying on time then the secured card payments won’t do anything to help your credit rating. 

One other thing to think about is whether the credit card company offers other non-secured cards you can convert to once your credit rating improves. 

Secured Loans
The second method I’ll cover has nothing to do with credit cards, it involves a trip to your local bank.  My wife actually used this approach after we got married since she had never opened a credit card or taken out a loan and so had no credit history.

What we did was to put $1000 in a certificate of deposit (CD) at our local bank.  My wife then turned around and used that CD as collateral on a 12 month secured loan. The bank was willing to lend her $1000 since it was backed by a $1000 CD.  The loan went on her credit history so as long as she made her payments on time, it created a posititive track record for borrowing.

This method worked out pretty well for us. We wanted to make sure each loan payment was timely to help build her credit so we setup the loan payments to come right out of our checking account.  At the end of the year we cashed out the CD and put that money back into our checking account; the interest she earned on the CD ended up covered over half of the interest cost of the loan. 

Obviously the biggest obstacle to this method is how much cash you have on hand.  Although it didn’t cost us much in interest, we tied up $2000 in cash flow over the course of a year, $1000 in the CD and another $1000 in loan payments.

Establishing Your Credit History
The first step in establishing your credit history is to get a free credit report and see where you currently stand.  If you have bad credit or no credit then getting a secured credit card or secured loan and making your payments on time can help you get where you need to be.  It’s best to start with one line of credit and monitor your credit rating over time. 

If you’re building up your credit so you can apply for a loan, don’t apply too early.  Make sure you’ve raised your rating up high enough so that you feel confident you’ll be approved.  A loan application will create a hard pull on your credit report, something you want to minimize when you’re just starting to build or repair your credit history.


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Ben Edwards, the founder of Money Smart Life, saved up enough to buy a Nintendo back when he was 12 years old. When he used the money to buy shares of Wal-Mart stock instead, he knew he wasn't like the other kids... His addiction to personal finance has paid off for his family and now he's helping you to afford the life that you want. Check him out on the web at Google Plus, Twitter and Facebook.

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9 Responses to Secured Credit Cards & Secured Loans Can Help Build Your Credit History

  • Personal Finance Tips

    Even if you don’t plan on applying for a loan, or getting a new apartment or a new insurance policy anytime soon, it’s a good idea to start building your credit score now so it’s there when you need it.

  • anna

    Can you please tell me how many points do you get when you put 1000 cd as collateral towards your secured loan
    thank you

  • Big Winner

    The secured credit cards look very interesting. I got a credit card with a $300 limit in high school, but my parents co-signed. Also, congrats to the letter writer for being debt free!

  • Ben

    Oops, thanks for catching the typo. It was supposed to read “This card doesn’t have an application fee …” Thanks, I fixed it.

  • Confused


    The Bank of America Secured Visa Card has a little lower annual fee than the Orchard Bank Mastercard Secured, $29, but a higher APR. This card doesn’t have an annual fee and also offers online banking. The Secured Visa Card requires a minimum deposit of $300 into a Bank of America security deposit account.



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