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Dr. Don Taylor, CFA, Bankrate.com advice columnistBuilding credit with a secured credit card

Dear Dr. Don,
I have just started building my credit history and hope to have a good solid one in a couple years. I got a secured card from Bank of America and I will have it for a year come August. I was wondering if I should close out the secured credit account once I apply for an unsecured card once my year is up.

Or if I should still keep my unsecured card due to the fact that I heard it looks good to lenders to have accounts with a long history. I have a mortgage in my name and that one secured card.
-- Danny Deliberation

Dear Danny,
Your credit score is based on the information in your credit report. Lenders use credit scores to help determine who they will lend to and, if approved, what interest rate they will charge the borrower. A credit score is based on the following five components:

5 components of a credit score
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As you point out, the reason to keep the secured card account is for the length-of-credit-history component of your credit score. The downside to that is that the card company continues to hold your money on deposit.

On its Web site, myFICO states that it's not a good short-term strategy to close accounts in an attempt to raise your credit score. You'd definitely want the new card in hand before even considering closing the secured card account.

Secured cards typically have a credit line equal to the amount of money you have on deposit with the card company. Not all secured-card providers report payment histories on the card to the credit bureaus. You can check to make sure that Bank of America reports your payment history by looking at your credit reports. Once a year you can get a free credit report from each of the credit bureaus. The Bankrate feature, "Free credit reports for all," tells you how to get your free reports.

Your secured-card provider may be willing to switch you to a standard card without having to shop other card providers. Don't apply to multiple card companies, because every application shows up on your credit report as a credit inquiry. Customer-initiated inquiries stay on your credit report for two years but only influence your credit score the first year. Talk to Bank of America about getting a standard card from them, and shop credit cards using Bankrate's credit card search feature.

Dear Dr. Don,
I'm planning to build my credit score with a secured credit card. I have been told the best way to do so is by not paying off the balance completely so the bank can earn money and therefore the credit score will go up. How does it work?
-- Magdalena Moderation

Dear Magdalena,
The bank earning money doesn't have anything to do with your credit score. Your credit score is based on the information in your credit report, as I explained to Danny in the first letter. Your credit report will show the outstanding balance on the card and the lifetime high balance on the card, along with the card payment history. There's nothing in the credit report about the bank's profitability on your account.

That said, if you never carry a balance because you pay off the card in full each month, you're not demonstrating the ability to handle credit, which is what the credit card company is looking for, along with a good credit score.

Don't charge up to the limit on your card. It makes you look too dependent on the card.

Buying something and taking a month or two to pay it back is a reasonable approach to building a credit history with your secured card. The Bankrate feature, "Using a credit card to establish good credit," has more on building a credit history with a secured credit card.

To ask a question of Dr. Don, go to the "Ask the Experts" page, and select one of these topics: "financing a home," "saving & investing" or "money."

Bankrate.com's corrections policy -- Posted: May 4, 2006
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