Establishing credit can be tricky if you do not already have credit. The first thing any lender wants to do when you submit an application for a credit card account is to check your credit history. If you have no previous credit, there will not be anything on the credit history that suggests that you are qualified for credit.:: One matter that everyone who needs credit wants answered is how do you earn credit if you don't have any already?

There are a number of ways to establish credit, but the smartest of them is for you to apply for a credit card account with a company that offers a secured credit card. Secured means that the account is backed up by cash security. When you open your account, you will provide the bank with a cash deposit to act as collateral. In some cases, the limit will be no more than half of the collateral total, but generally, you will be granted a limit of close to the total deposit amount. Your charge card will be given to you with an available limit that does not exceed the amount of the deposit. Your deposit will be put into an interest bearing bank account for you and as long as you have the account, the cash will be held there.
 

Secured credit cards vary from prepaid credit cards, where there is no savings account that protects the card. With prepaid cards, the cash becomes the cards limit. Prepaid cards may be "refilled" for repeated use, but they are generally regarded as debit cards and do not help you establish a credit history, but there are a few exceptions to this. Prepaid cards have a limit of the amount of cash you gave them when you purchased the charge card.

You may continue to use a secured account for as long as you want, but in time you will almost certainly want to try to acquire a traditional one instead. You will receive bills every month, and provided that you pay them when they are due, you will be earning a financial history of your own and building your FICO credit score. A collateral-backed account is otherwise indistinguishable from any other Visa or Masterdard. Having applied for and put up a cash deposit to secure the account, you will have an account that you may use like anyone else might use one.

Unsecured charge cards have a tendency to have lower interest rates than do collateral-backed accounts. For anyone who needs to establish a financial history, a secured account is the way to go, but you do not want to keep using one any longer than is positively necessary, as they are simply too costly. Typical accounts are not as likely to come with an annual charge for their use, and they don't tie up your cash in a bank account that you can't touch.