What is the Best Credit Card for No Credit History?
I can’t qualify for a credit card because they say I have no credit history. But how am I supposed to build one if they won’t give me a credit card?
The best credit cards for building your score when you have no history
Having no credit score can be just as frustrating as having a bad one. And you don’t just get turned down for traditional credit cards. You can also be turned down for loans, have problems renting an apartment, and even be required to pay extra deposits for things like utilities or renting a car.
There are basically four options available to someone with no credit history who wants to build credit:
- Become an authorized user on another credit user’s account.
- Get a secured credit card
- Get a store credit card
- Use a credit builder loan
Option 1: Becoming an authorized user on an existing account
The first option is often the way that young adults first start building credit. A parent or guardian makes them an authorized user on an account. They can use the credit card, and although the cardholder is responsible for making the payments, the authorized user builds credit history as well.
Of course, this requires you to know someone who has a credit card, uses it responsibly, and is willing to put you on their account. You may either not be in a situation where you have someone you can ask, or you may simply want to build credit independently. In this case, the next option is often the best one.
Option 2: Getting a secured credit card
Secured credit cards are often the best cards for someone who has no credit history. They don’t require a credit check to open the account.
What’s the Best Way to Establish Credit If You Have No Credit?
Secured credit cards are often the best way to establish credit and build credit history when you have no credit. This video explains how these cards work and what you can do to build credit quickly.
April Lewis-Parks, Consolidated Credit Director of Education: Hi, it’s April with Ask the Expert for Consolidated Credit.
You know, we’re always asked, what’s the best way to establish credit?
And a quick and easy way to do so is to apply for a secured credit card. A secured credit card works just like a regular credit card, except that you place a deposit with the credit card company as collateral.
A security deposit gives the lender confidence that you’ll pay them back, even if you have damaged or no credit history. And that’s because if you fail to pay your bill, the lender can keep your deposit.
Also, the deposit is usually equal to your credit limit. For example, you send ABC creditor $800 as a security deposit for the card and now your credit limit on the card is $800.
But a secured card is not like a debit card, where it’s associated with your bank account. You will get a monthly bill and you are required to at least make the minimum payments on the card. The payments are not deducted from the security deposit you make with the issuer.
But some of the best secured cards may allow you to upgrade your account to an unsecured card after using the card responsibly for a period of time. And please be sure to always pay off your entire balance as you’re establishing your credit.
On-time payments count the most – 35% of your score. And it’s best not to carry any debt. But use the credit card to your advantage to get a good credit score.
As you’re looking for secured credit cards, these cards will put you in the best position to build credit:
- Look for a card that can be converted to an unsecured card. Otherwise, you won’t be able to get your security deposit back without closing the card. Closing your oldest credit card can end up damaging your credit score, which you don’t want to do.
- Some cards offer a bonus limit. While some cards only give you a credit limit equal to your deposit, some give you extra. Having a higher limit makes it easy to maintain a higher credit score as you use the card.
- Avoid cards with added fees. Fees will eat into your budget, so you want to avoid them whenever possible. This will be true when you start using traditional cards, too.
As you look for a secured credit card, realize that the card is likely to have a higher interest rate. Most secured cards have APR over 22%. Such a high rate means that roughly two-thirds of every minimum payment would cover accrued monthly interest charges and interest will build quickly if you don’t pay off the balance. Hence, you want to pay the balance in full every month.
Option 3: Store credit cards
Another option for someone with no credit history is to get a store credit card through a retailer. These are the cards that you see advertised at checkout, that promise big savings for signing up. In many cases, you may be able to get the card with little or no credit history.
Be careful! Although it is easy to get these cards, they aren’t always a good idea. They can have interest rates that as high or even higher than secured cards. Unlike a secured card, you can generally only use them at that one retailer. What’s more, the discounts they promise often don’t match up to the costs.
That’s not to say that some store credit cards may be beneficial to some people. If you do most of your shopping at one retailer, then it may make sense to get that store’s card. Just make sure to read the fine print on the contract carefully. Look out for terms like “deferred interest” and added fees.
With these types of cards, you also want to take extra care to pay off the balance in full every month. Again, high-interest charges will quickly offset any discounts or rewards you earn. Still, if you can keep the balance paid off, these cards can be beneficial for some consumers.
Option 4: Credit builder loans
There is one last option that can help you build credit if you want to avoid credit cards altogether. Credit builder loans are small personal loans that allow you to build credit and savings at the same time.
You set a small loan amount, for instance, $500. You make payments, typically over a short term, such as 12 or 24 months. Once you finish paying off the loan, you receive the money for the loan amount.
These types of loans are designed for people who are working to build a credit history. You can usually get these types of loans through local credit unions if you’re a member. There are also apps like Self that provide credit-building loans.
The best way to build credit when you have no credit history
- Apply for one credit card or credit-builder loan to start.
- Make payments for six months; if it’s a credit card, pay the bill in full every month.
- After six months, consider getting another credit card or a credit builder loan if you got a secured card in step one.
- Make payments on both accounts, keeping credit card balances paid off.
- Gradually add more credit, building your way to loans like a car loan and a mortgage, which are some of the best loans to have in your credit mix.
Some secured credit cards and credit building loan apps will provide you with free score tracking, which will let you monitor your progress. If your accounts don’t offer this, then consider getting a free credit monitoring app like Credit Karma or Credit Sesame. This will allow you to see where your score is.
You generally want to build your score to at least 650 before you apply for larger loans. While you may be able to qualify with a lower score, the interest rates will be high. Also keep in mind that while you can generally qualify for traditional cards once your score is about 600, the interest rates will be high on those as well.
Always make sure you can afford the payments before you open any new loan or credit card. And remember, paying your balances in full is the best policy.
Avoid actions that will hurt your progress!
Be aware as you’re building credit and improving your score that there are actions you can take that will result in a decrease:
- Missing any payment. A payment is missed when you go one billing cycle without paying the bill. Late payments (those not submitted by the due date) will result in late fees, but they won’t damage your score. It’s only when a payment is completely missed that your score will take a hit. One missed payment can decrease a consumer score by more than 100 points in some cases.
- Carrying a balance greater than 30% of your available credit limit. If a card has a limit of $600 and you’re carrying a balance of $200 or more, it will damage your score.
- Closing a credit card. Closing a credit card account decreases your credit age and the total number of accounts that you have, which can hurt your score. This is particularly true if you close your oldest account, which is why you want to keep it open.
Keep in mind that since you are new to credit, any negative will have a much bigger impact because you don’t have much other credit history to offset it.
If at any point you see that you’re starting to have trouble managing your bills or keeping your balances low, call 1-888-294-3130 to speak with a certified credit counselor.