On secured cards, add bigger deposit to goose score

A higher credit limit, left unborrowed, will benefit key scoring factor

Opening Credits columnist Eric Sandberg
Erica Sandberg is a prominent personal finance authority and author of "Expecting Money: The Essential Financial Plan for New and Growing Families." She writes "Opening Credits," a weekly reader Q&A column about issues for people who are new to credit, for CreditCards.com.

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Question Dear Opening Credits,
I applied for a secured credit card to start building credit. It says my credit line will increase if I add more money before the account opens. When will the account open so I know if I’ll have time to add money? – Brett


Dear Brett,
Many banks, credit unions and credit card companies issue secured credit cards, and each sets its own rules regarding credit limit increases. To know your issuer’s precise details, either call your card issuer or visit its website.

For example, the Capital One Secured Mastercard states on its website that you can increase your credit line with a larger deposit “80 days after you were approved and before you activate your card. You can raise your initial credit line by the amount of your additional deposit, up to $1,000.”

Regarding when the account will open, that occurs after you’ve been approved and activate the credit card. You’ll receive the card in the mail, and the instructions to activate your card typically will be on a sticker on the card, as well as in the accompanying paperwork. Note that some credit card issuers may cancel the account after a few months if you don’t activate your card.

A secured credit card is a perfect tool to establish a credit history, but it’s important to wield it in just the right way. You’ll have to be careful how much you charge in relation to the credit limit. These products usually only require a small amount of money to be put down as collateral, and in most cases the credit limit is equal to that sum.

If you want to create a high credit score, you’ll need to keep your balance well below that credit limit. Credit utilization (how much credit you use compared to your credit limit) is a major factor in credit scores, and a good rule of thumb is to not owe more than 30 percent of what you can borrow, although less than 30 percent is even better.

So, let’s say your credit line is $500. A couple of nice dinners out in a month can cause you to hit that credit ceiling in a flash. Then if the credit scoring company (such as FICO and VantageScore) inputs your card balance into its algorithm before you delete the debt, your credit scores might sink because it looks like you’ve maxed out the card.

For this reason, a larger credit line can be beneficial. If it’s $1,000, and you made charges totaling $300 and then paid off the balance by the due date, you’d be in fine scoring shape. No debt is best, so make a habit out of paying the entire bill every month and on time. Payment history is the most important credit scoring factor, so never miss due dates.

Once you’ve had the secured card for at least six months and have used it responsibly, the credit card issuer may let you have your deposit back and turn your card into an unsecured credit card account.

If your credit issuer doesn’t move you to an unsecured account, that’s OK. After a year of using your secured card responsibly, consider applying for another card so you can augment your borrowing power. You can use the CardMatch tool at CreditCards.com to gauge which credit cards are within your reach, then apply for the one you like best. Because each credit application triggers a hard inquiry that shows on your credit reports and lowers your scores, using CardMatch will help you to avoid unnecessary credit inquiries in your search for a card.

It would be a good idea to keep the secured card active (if you don’t mind the funds being tied up) for a while, too. Length of credit history is another scoring factor, and the longer you’ve had a card open and in use, the better. Multiple accounts in good standing also help credit scores to rise.

Eventually, you may want to close the secured card and reclaim the funds held in deposit. If you follow this plan, in which you get a second card before you close the first, you should be safe from a serious drop in your credit scores. Yes, your scores will go down a bit when you close the original account, but those numbers will recover with responsible use of your second card. After a few years, your credit scores are sure to be in beautiful shape.

See related: 9 things to know about secured cards, Your low-limit secured card strategy: Pay the bill early, often

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Updated: 11-19-2018