Secured Credit Cards

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You probably know first-hand that students usually don’t learn much about managing finances in school. So if you’re a parent, it falls to you to be sure your child learns that building good credit is vital to many aspects of life. It comes into play any time someone rents an apartment, secures an auto loan or searches for a good rate on car insurance. It can even become a factor when looking for a job! Learn more about credit scores from “Know the Score Before Applying for Credit.

Using credit responsibly is the best way to build a good credit rating. However, effective February 2010, new federal regulations have made it more difficult for young adults under age 21 to secure a credit card in their own names. Without having a parent co-sign, they may not be able to obtain a traditional credit card – or begin to build credit at all.

Consider a Secured Credit Card

If obtaining a traditional credit card isn’t possible, a secured credit card might be an option. It can help young adults – or anyone else – build credit just like a standard credit card, but there’s one major difference: You start by making an initial deposit.

Here’s how it works:

  1. You make a deposit at a bank or credit union. The amount you deposit becomes your credit limit – and proves that you can repay the amounts you charge.
  2. You receive a bill each month. You can pay any amount between the minimum payment and the full balance, just like a regular credit card.
  3. Your credit score is affected the same way as if you use a regular credit card. Make payments on time and keep a low balance, and you’ll build good credit.

As a bonus, some banks and credit unions pay interest on your initial deposit. So when you are ready to move on to a standard credit card, you will receive your initial deposit back – plus interest.