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I don't have enough credit history to generate a score, so I got a secured card with a $500 limit. I have been making small charges, less than $70, and paying them off in a couple of days. I've been told it would be better to keep a small balance of about $10 or so on the card. Is this true? The goal is to build my credit score as high and as fast as possible.
- JTD
Dear JTD,
You're on the right track. Secured credit cards are a great tool to help you begin building a strong credit history, as long as the lender reports card payments to the credit bureaus. However, you do not need to carry a balance from month to month to improve your credit scores—and, if possible, you shouldn't carry a balance at all.
How a Secured Card Works
With a secured credit card, you make a deposit into a lender's savings account, and in return you receive a credit card with a credit limit typically equal to the deposited amount. The deposit amount depends on the lender's requirements and how much you can afford, but typically ranges from $200 to $3,000. The lender uses the deposit as collateral in the event you don't pay your bills—but that doesn't mean you can use your deposit to pay your bills each month. When you make purchases on the card, you need to pay your bill with separate funds. Other than requiring a deposit, a secured credit card works exactly like a traditional unsecured card.
How a Secured Card Helps Your Credit
By using your secured card each month to make small purchases and then paying off the balance in full, you are demonstrating your ability to manage credit. Because payment history is the most important factor in your credit scores, paying your credit card bills on time is one of the simplest ways to boost your credit.
Why You Don't Need to Keep a Balance
As long as you use the card frequently, it is not necessary to carry a balance over from one billing cycle to the next. Paying off the balance right away not only ensures that you won't get stuck paying interest, but it also keeps your credit utilization rate, or amount of available credit you're using, low.
Your utilization rate, or balance-to-limit ratio, is the second most important factor in credit scores after payment history. The lower your utilization, the better, as it shows you're not relying too heavily on your available credit. By making all your payments on time and keeping your balances low, you are working toward building a positive credit history. With time, the lender may be willing to convert your secured account to a regular unsecured credit card.
Other Ways to Build a Strong Credit History
In addition to using your secured card responsibly, there are other ways to build your credit, such as:
- Making all your credit payments on time.
- Asking a family member to cosign on a new account.
- Asking a family member or close friend to add you as an authorized user to their account.
- Signing up to have your monthly utility and telecom payments added to your credit history with Experian Boost®ø. In the past, you couldn't get credit for making your utility and cellphone payments on time each month. Now, you can get credit for these payments by linking the account used to pay so your payments can be identified and added to your Experian credit report. Experian Boost can be especially helpful to people who have "thin" credit files or credit scores below 680. The service is free and takes only minutes. You will be provided with an updated FICO® Score☉ once you enroll.
Thanks for asking.
Jennifer White, Consumer Education Specialist