One of the biggest problems facing our generation is that many of us cannot apply for loans when it comes to expensive purchases such as a car or a house. The biggest reason for this is that we lack a credit history, which is very difficult to have if you’ve never had any form of debt.
Debt seems to be somewhat of a frowned upon word these days, but hopefully as you follow Dollar Sign University, you’ll learn the responsible ways to use debt to your advantage. Yes. Debt can be good in some cases! But you have to be wise with it.
One of the easiest ways to build a credit history is through a secured credit card.
A secured credit card is practically the same thing as just a normal credit card, but with one twist: you have to put a security deposit down.
Many times when someone decides to apply for a loan of some sort, they are required to present what is called collateral. Collateral is essentially something of value, such as a home, of which the creditor (the one giving the loan) can seize in the event that a loan is not paid back.
In essence, your security deposit is acting as collateral in a very liquid form for the credit card company. Say that you mess up and forget to pay your bill, not only will this VERY negatively impact your credit score, but you will also have funds withdrawn from your security deposit in order to cover the costs of your mistake.
DO NOT BE CONFUSED!
A secured credit card is not a debit card! Although in the case of a secured credit card, you are putting money down before receiving your card, that money should only act as a security for if you make a mistake, not as something you can withdraw from.
A debit card works by withdrawing money from your checking account at your bank. You deposit a check and money is transferred into your account, then you can swipe your card which transfers money out of your account.
When you make a purchase on a credit card, you are borrowing money, and at the end of your billing cycle, you are required to pay that money back. You can do that through a minimum payment (not recommended since it may end up costing you A LOT in the long run) or in full (recommended since it affects your credit score in the most positive way, and is the cheapest option in the long run).
For an example, I am going to use the Discover it® Secured Credit Card.
To obtain one of these cards is very simple. You first apply for the card and send over the money for your security deposit.
In the case of this card, your security deposit is going to be the same as your line of credit (the amount you’re allowed to borrow in a given billing cycle). The minimum is $200 and the maximum is $2500. That cash that you put down is held by the company for 8 billing cycles, and returned afterwards if you’re a responsible credit user, so that they can judge whether or not you are fit to posses an UN-secured credit card. I highly recommend choosing the maximum limit you can afford as it allows you to hold a higher balance on your card if needed, without exceeding a high percentage of your credit limit. It is best to hold a low percentage of your balance at any given moment. Do keep in mind however, that you’ll be unable to access the money you gave to them for 8 billing cycles.
After you apply and put down the money, they decide if you’re approved or not. If you are, then your card is shipped to you in the mail. You then have to use the card responsibly in order to boost your credit in the most healthy way possible.
Put some subscription purchases like your monthly payment for Spotify or Netflix on your card, connect your card to your bank account, set up an autopay program, and don’t use your card for anything else. This allows your card to never be charged more money than you expect each month, and it will automatically withdraw money from your bank account so you’ll never miss a payment.
Fast forward 8 billing cycles.
If you have been responsible you’ll receive a nice “surprise” deposit into your account from Discover, and you will have proven that you can build credit with an unsecured card. You’ve now built a bit of a credit history, which although it may not be good enough to apply for a home loan, it is a great start to getting there!
Make sure to read the upcoming articles released every Monday, Wednesday, and Friday. Also be sure to check out Amy Roger’s articles on Thursdays! If you haven’t already, please share us on social media so we can gain a bigger audience and help more people!
As always, contact me with any questions!