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Monthly Parents Magazine Article - "Building Credit Safely" - Wednesday, August 01, 2012

Building Credit Safely

Credit cards, when used responsibly, are a great way for consumers to build credit.  Itís ideal for people who are just starting out with building a credit history as well as those who are recovering from a major life event like illness, bankruptcy, divorce or job loss.  Secured Credit Cards are a great way to quickly open the doors to building credit.

Secured credit cards:
These cards look and act like "regularĒ credit cards, except the line of credit is secured with a cash deposit.  With a deposit of $500, the consumer receives a credit card with a $500 limit; this arrangement allows consumers who would otherwise not be able to access credit the opportunity to build a new positive credit history.

How does it build credit?
By using the credit card for purchases then paying the balance due on time each month, a personís credit history will be improved.  Lenders want to see a history of prompt payments and responsible use of available credit, and secured credit cards are a great way to build that history.   

What to watch for:
Make sure that the financial institution reports to the 3 credit bureaus: Experian, TransUnion and Equifax.  Also, make sure that you understand all the fees involved with the card. 

Moving to an unsecured credit card:
It usually takes six to twelve months of reporting to rebuild credit enough to become eligible for the account to be changed into an unsecured credit card account, and the money put down as collateral is released back to the consumer.

Secured credit card versus co-signing for a credit card:
If you are in a situation where you are trying to help someone build credit, a secured credit card is a safe way to assist without putting your credit at risk.  By making the deposit on a secured credit card, you can get your deposit back when the person builds their credit history; conversely, if the person doesnít fare well, you only loose the money put down as collateral.  When cosigning for someone, their account is counted in your debt to income ratio, all late payments they make count as late payments on your credit history too and if they donít make payments then you are liable for their debts.