Reaping Your Rewards

10-step plan for graduating to a prime credit card


While most people wisely avoid subprime cards — which feature low credit limits, high annual fees and sky-high annual percentage rates — they are one of the best ways for consumers boost their credit before graduating to a better card, experts say.

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More than 70 million people in the United States qualify for subprime cards, according to an August 2008 study. While most people wisely avoid these cards — which feature low credit limits, high annual fees and lofty annual percentage rates — they are one of the best ways for consumers to establish, improve or repair their credit histories before graduating to more attractive cards, experts say.

“Low-limit credit cards are a great way to get in the credit game, says Steve Bucci, president of the Money Management International Financial Education Foundation and author of “Credit Repair Kit for Dummies.” “If you’re new to credit and have no history, you’re going to build it very quickly — if you take some precautions.”

Lenders will take a chance on high-risk users by offering cards with credit limits of $250 or $500 and APRs which typically exceed 20 percent. These cards have long been one of the best tickets to building a shinier credit report — as long as cardholders mind their credit Ps and Qs. In fact, at least 35 percent of users of low-limit, or subprime credit cards improved their scores within two years, and more than 60 percent of that group increased their score by 40 or more points and earned a credit limit boost, according to an August 2008 study by Citizens for Equal Access to Credit, a Washington, D.C., based nonprofit working to ensure low-income Americans have fair access to credit.

Heather Boerner did just that. The San Francisco journalist was able to re-establish her credit with a card limited to $250 after she defaulted on grad school loans and credit card balances she carried for a decade. Boerner was willing to do anything to stop the harassing phone calls, and a subprime card was the answer. “I would wake up in a cold sweat in the middle of the night worrying they would recreate debtors’ prison for me,” she says with a laugh. “I couldn’t even get a Victoria’s Secret card.”

Boerner was surprised Capital One issued her a card, and for a year, she was careful to charge no more than $100 or $200 monthly and make timely payments — once even rushing to a Western Union office to ensure the balance was paid in full.

One year later, her limit was bumped to $5,000. “I knew I could not be trusted with $5,000 — that would be tempting fate,” Boerner says. She called the card company and asked that her limit be lowered to $500, where it stayed until she closed the card last year. Today, Boerner enjoys a clean credit report and holds a single credit card which she has stashed away for emergencies only. “That low-limit card really gave me my financial training wheels,” she says.

10-step plan for graduating to a prime card

To graduate from a subprime credit card to a prime card, take these steps:

1. Use it, says Don Davis, branch manager for HighTechLending mortgage brokerage in Marysville, Wash. “It has to be used,” says Davis, who leads credit workshops in his community. “That means once you have the card, you have to use it for a $5 latte or a tank of gas.”

2. Pay it off in full every month. “That shows you have discipline,” Davis says.

3. Determine how much you can afford to charge each month before you accept the card. “Start with an understanding of how much discretionary income you have to spend,” Steve Bucci says. “These cards don’t give you more money to blow every month.”

4. Charge less than 50 percent of the limit. Davis suggests limiting your spending to 10 percent to 30 percent of the allowed maximum. “It doesn’t make a difference whatsoever on your credit score if you have a silver, gold or platinum card,” he says. “The only measure that matters is the differential between your balance and the limit.”

5. Set up one or two monthly, fixed, recurring bills to be paid automatically by the card. Davis suggests arranging for your Internet service or cell phone bill — assuming you don’t run over your minutes — to be paid automatically by the subprime card. This is a great tool for minimizing temptation while using the card to build credit history.

6. Go online and pay the card automatically. Most cards allow you to link your card to a bank account and pay it automatically before the due date. Combined with the automatic use, this can be a low-hassle way to graduate to a higher limit card.

7. Ban the card from your wallet. The less frequently you see the card, the less likely you will abuse it, Davis says. “I advise people I counsel to literally freeze the card: Put it in a glass of water and stick it in the freezer,” Davis says. “If you have it in your wallet, that means you’re going to pull it out and start buying shoes and electronics and crap you don’t need.”

8. Steer clear of charges that tag you as high-risk. Recent reports reveal that credit card companies frown on high-risk behavior such as gambling. “If you’re tapping the card at the casino, that card company is probably going to be paying attention,” Don Davis says. “Especially if you’re nearing the limit of your card.”

9. Consider paying the card biweekly online, coinciding with payday. Some card users find this system makes it easier to control spending and to remember to pay the bill. This trick won’t affect your credit building, Davis says. “Even if you pay the card two weeks before the statement is issued, it still registers as activity,” he says.

10. Don’t trust anyone else with the card. Davis even discourages spouses from sharing subprime cards. “The reason for the card is to establish or re-establish credit and to manage the balance and activity,” he says. “You want to be in full control and never have any surprises. If you want someone else to have use of a credit card, have them get their own.”

Georgia State Rep. Pedro Marin literally paid the price for his lack of credit history after moving to Norcross, Ga., from Puerto Rico in 1995. When his car was stolen, he paid premium prices for rentals. Lack of credit made it difficult to rent an apartment, and financing a new vehicle was tricky. “You even needed good credit to rent a movie,” Marin says.

After successfully using a subprime card with a $300 limit and $100 annual fee, Marin slowly built his credit. Soon he bought a car. Three years ago he purchased a house and recently leased another vehicle. “Now I have freedom,” he says. “Credit has helped me do all those things.”

See related: Glossary of common credit card terms

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