A while back, a friend of mine called me asking for a favor: She wanted to borrow my credit card to buy something online.
“How come?” I asked. “Don’t you have a credit card?”
To which she told me she didn’t have one.
Here’s an exclusive look at my reaction in GIF form.
After I finished pulling out my hair, I suggested that she get her own credit card and start building her own credit instead.
“I can’t get approved for a credit card,” she told me. “I have no income.”
My solution to her: Get a secured credit card.
What is a secured credit card?
A secured credit card requires you to put down a few hundred dollars into a savings account. That money is used as collateral that the bank uses when they issue you credit.
This is typically the same amount as your credit limit. For example, if you deposit $500, that means you’ll have $500 in credit to spend. It’s like a deposit that the credit card company holds on to until they deem you trustworthy.
And if you consistently pay your credit card bills on time, you’ll eventually get this money back. After a few months of this, you’ll also be able to graduate to a regular (or “unsecured”) credit card.
That’s why these credit cards are perfect for people who have:
- Bad credit.
- No credit at all.
- No source of income.
For my friend, she didnt have any credit or steady income. This made signing up and getting approved for a traditional credit card difficult for her. With a secured credit card, she’d be able to build solid credit without having to worry about her lack of income.
A secured credit card can also be helpful for anyone looking to circumvent the Catch-22 of needing credit to build credit: You can’t build credit unless you have it.
What are some good secured credit cards?
Most all banks will offer you their own version of a secured credit card. Simply call up your bank and ask them, “What kind of secured credit cards do you offer?”
If you want a few solid suggestions for cards, though, here are a few that I recommend:
Capital One Secured MasterCard
Image source: Capital One
Annual fee: $0
Minimum deposit: $49, $99, or $200 depending on your credit-worthiness
With the minimum security deposit, you’ll also receive a $200 line of credit. If you make your first 5 monthly payments on time, you’ll gain access to even more credit (solid encouragement for you to be good about your credit).
OpenSky Secured Visa Credit Card
Image source: WalletHub
Annual fee: $35
Minimum deposit: $200
Great secured credit card for anyone who has bad credit or just wants a reliable card to establish good credit. You can also use your debit card, a check, or money order to put money down for the security deposit (no traditional bank account needed!). While there is a $35 annual fee, you can get it waived using the right script.
Discover it Secured Credit Card
Image source: Hustler Money Blog
Annual fee: $0
Minimum deposit: $200
This one comes with rewards including 2% cash back anytime you spend money at restaurants and on gas, and 1% cash back on everything else! Also, after eight months of using the card, Discover will automatically review your account to see if you’re eligible to be upgraded to an unsecured card.
How to build good credit with secured credit cards
If you have a bad credit score or are nervous about the seemingly daunting task of building good credit, let me make one thing clear: You can always make your credit score better — even if it’s currently nonexistent.
And you don’t need to be a personal finance weirdo like me in order to raise your credit score. Instead, you need to start using a simple system that’ll help you improve your credit score.
Before we jump into the system, though, it’s important to understand what your credit score is and what goes into determining the actual number.
This is what your score is made up of (courtesy of Wells Fargo):
- Payment history: 35%
- Amounts owed: 30%
- Length of credit history: 15%
- How many types of credit in use: 10%
- Account inquiries: 10%
Using each of those elements, you’ll receive a number between 300 (bad) and 850 (good). This number is your credit score.
Knowing this, there are three steps you can take in order to build good credit and improve your score:
Step 1: Automate your credit card payments
The biggest portion of your credit score is determined by your payment history, or whether or not you paid your bills on time. That’s why it’s of the utmost importance that you do so if you want a good score. In fact, just one missed payment means your credit score can take a 90 to 100 point hit.
That’s why you should automate your finances so this is done passively for you every single month.
And it’s simple: At the beginning of the month, when you receive your paycheck, the money is immediately sent to where it needs to go through automatic systems that you have set up already.
A while back, I created a video that shows you how to automate your finances in 12 minutes. Check it out.
A few notes:
- This system allows you to subvert your limited willpower by helping you save money without ever having to do it yourself.
- You can set it up so you’re paying off your entire credit card balance each month — and even if you can’t, you can still improve your score by paying at least the minimums on time (though you should pay everything in full).
- This system goes beyond your credit card, allowing you to passively save money for the things you love, pay off all your bills on time, and invest money for retirement. Big wins all around.
If you haven’t automated your finances already, take a break from this article to do it right now. Seriously. It’s that important.
Once you’ve done that, let’s move on to another important step: Getting rid of your debt.
Step 2: Crush your debt IWT-style
Debt is a HUGE detriment to your credit score with “amounts owed” representing 30% of your number. That’s why you never want to carry a balance on a card, especially when you’re just starting out with a secured credit card. Build those good habits now.
Getting rid of your debt is so important, that it should be one of the first things you do if you want to work towards living a Rich Life. (And you shouldn’t be looking at secured cards if you have other credit card debt. Pay that off first.) That’s the main reason why I don’t allow anybody in debt to take my courses.
If you want to know how to get rid of your credit card debt, I have a fantastic system for it in my article on how to get out of debt fast.
For even more help, here are three of my best resources on getting rid of debt:
- IWT’s credit card debt payment calculator.
- Pay off your credit card debt, IWT style.
- Case study: How one reader cut the time to pay off her debt from 33 years to 5.
Luckily, if you’ve automated your finances, you’re already well on your way to getting rid of your debt.
Step 3: Spend money on the card — but not too much!
It isn’t enough to have a line of credit open. You also have to use it if you want to build good credit.
Too often people think they need to cancel their credit cards in order to recover from a bad credit score. However, this is a pretty bad idea. After all, 15% of your score is represented by your credit history and 10% is represented by the types of credit you have open. If you cancel your cards, you’re deleting all of that history!
So even if you don’t use a credit card that often, you should at least put a small recurring payment on it. Some suggestions:
- Subscription services such as Amazon Prime, Spotify, or Tidal (just in case Jay-Z is reading this).
- Utilities such as water, cable, electricity, or phone bill.
- Ride share apps like Lyft or Uber.
This way, you make sure your card is nice and active and you get to maintain your credit history.
And remember: You’ll want to pay off everything in full each month if you can. I realize that sometimes emergencies come up and there might be the odd month or two where you can’t pay all of it off. That’s okay! Life happens. The important thing is that you remain as consistent as you can and work towards building solid habits that’ll help ensure your financial future.
Bonus: Make your credit cards work for YOU
You can now get a full chapter of my New York Times bestselling book, I Will Teach You to Be Rich, on optimizing your credit cards for free.
It’ll help you tap into even more perks, max out your rewards, and beat the credit card companies at their own game.
I want you to have the tools and word-for-word scripts to fight back against the huge credit card companies. To download it free now, enter your name and email below.