 Building
credit with a secured credit card
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 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:
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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."
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