In 2008, I moved to the U.S. with my wife, Margarita, after living in Moscow. Although Margarita had an impressive career in Russia, she was not a U.S. citizen and had no credit history or credit score. If you donâ€™t have a credit score in the U.S. this basically means you donâ€™t exist, at least in the eyes of lenders. In fact, one in 10 Americans is considered â€ścredit invisible,â€ť meaning they donâ€™t have enough credit history to produce a credit score.
This was a problem we knew we had to fix fast, especially if Margarita wanted be able to take out credit cards or an auto loan, or even apply for an apartment lease in the future.
By following a few basic steps, within 12 months, she had a very good credit score. Within 18 months, she had an excellent credit score and qualified for a rewards credit card with a $25,000 credit limit.
Opening a secured credit card is relatively easy. You have to provide the bank with a deposit, which is typically $200 or more. The bank will keep the deposit as collateral and will provide you with a credit limit equal to your deposit â€” some cards may even give you a higher limit without requiring a larger deposit. In Margaritaâ€™s example, she gave the bank a $500 deposit and received a $500 credit limit.
Once open, the credit card works like any other. Your credit limit, balance and payment information are reported to the three major credit bureaus. The only difference: If you fail to pay your credit card on time, the bank can take your deposit and apply it toward the debt.
So the bank has a guarantee that they wonâ€™t lose money. And you have the opportunity to prove that you will use your credit wisely.
Given that I was a bank credit risk manager at the time, I knew a bit about credit scoring. So I made sure Margarita followed this strategy:
It took about six months for Margaritaâ€™s score to cross the 600 threshold. About 18 months after starting, she had a score well above 700. At that point, she applied for a rewards credit card. It had a great sign-on bonus and a $25,000 credit limit.
So it only took a year and a half for someone to go from being a credit nobody to one of the most sought-after customers in the country. What was the trick? It is actually very simple.
In order to have a FICOÂ® Score, you must have activity on your credit report over the past six months. If there is no activity on your report during this time, you cannot get a score.
Activity does not mean you need to go into debt. You can make a single purchase every month (even for just $1) and that is considered activity.
One of the most important components of your credit score is utilization, making up 30% of your FICOÂ® Score. Your utilization is calculated by dividing your statement balance by your total available credit. People with the best credit scores have utilization levels of 10% or less, but at most, you want to stay below 30%. That means if you have a credit limit of $1,000, you should not spend more than $300 a month.
The best strategy with a secured credit card is to select one small, recurring transaction and automate it. For example, use your secured credit card for your monthly Netflix or SpotifyÂ® bill.
The most important part of your credit score is a history of on-time payments. This factor alone comprises 35% of your FICOÂ® Score. Even a single missed payment can have a very negative impact on your score. The best way to ensure that you donâ€™t miss a payment is to set up autopay.
Additionally, make sure you pay your balance in full, so you will not have to pay interest. There is nothing more ridiculous than paying interest on a secured credit card. Remember: Your credit limit is equal to your deposit. You are literally borrowing your own money. But if you pay interest (at a high rate), you will be paying a bank to borrow from yourself.
This is just a long way of saying that Margaritaâ€™s approach worked. If you want to use a secured credit card to build your credit score, just use it every month for a $10 charge. And pay that balance in full and on time. As a result, your score should improve.
When selecting a secured credit card, we recommend you focus on the annual fee â€” you shouldnâ€™t have to pay one. You can find our roundup of the best secured cards here.
Our top choice is the Discover itÂ® Secured<!–Discover it® Secured–>.
How the Discover itÂ® Secured<!–Discover it® Secured–> works
There is a typical $200 security deposit, but you can receive it back if: 1. You pay your balance in full and close your credit card account, 2. You qualify to be refunded your deposit during one of Discoverâ€™s monthly automatic account reviews (starting at eight months from account opening) and 3. You upgrade to an unsecured card.
Cashback rewards: In this cashback program, you earn 2% cash back at restaurants or gas stations on up to $1,000 in combined purchases each quarter and 1% cash back on all other purchases.
The cashback match. The Discover itÂ® Secured<!–Discover it® Secured–> has a new cardmember bonus where Discover automatically matches all the cash back youâ€™ve earned at the end of your first year. The cashback rate is great in general, as few secured cards have rewards, and itâ€™s primarily beneficial for people who typically spend on gas and dining. The cashback match you receive is unique because there is no minimum spending requirement for you to earn the additional cash back. Most cards set a three-month time period and minimum spend for you to earn a new cardmember bonus, but not Discover.
Typically, for secured cards from the major issuers such as Discover, Capital OneÂ® and CitiÂ®, the upgrade from a secured card to unsecured card involves:
If your card doesnâ€™t have an automatic upgrade process, we recommend the following: