If you’re new to credit and have not yet established a credit history, it can often seem impossible to find a lender willing to approve you for your first credit card. It’s a bit of a Catch-22 — lenders want to see your credit history and how well you’ve managed credit obligations in the past before they’ll extend new credit, but how do you get credit if you don’t have credit? It’s a frustrating dilemma that most of us face at some point in our lives. Fortunately, the situation isn’t as dire as you may think.
How Do I Get a Credit Card With No Credit?
There are credit cards for no credit. Secured credit cards, in fact, are specifically designed to help people build or rebuild their credit scores, while student credit cards, too, are geared toward young consumers who are just getting started. Plus, you could always see if a friend or family member will add you as an authorized user on their credit card account.
We’ll break down all these options to help you find the best first credit card for you. But, before you assume you don’t have a credit score, be sure to check yours. If any of your accounts (including student loans) have reported information to the major credit reporting agencies in the last six months, you should have a score.
What Is a Secured Credit Card?
A secured credit card works much like a traditional credit card, except you open the account by making a cash deposit to “secure” the card. The credit limit on a secured card is equal to the cash deposit, which acts as collateral and minimizes the bank’s risk in the event that you don’t pay the bill. For example, if you deposit $1,000 for a secured card, your credit limit on the card would be equal to $1,000. Most secured cards can be opened with as little as $200 or as much as $2,000.
What Should I Look for in a Secured Credit Card?
If you’re opening a secured credit card for the purpose of establishing credit there are a few things you need to be aware of. First, secured cards often carry high-interest rates and annual fees, so they’re not something you’ll want to use long term. The goal is to establish and build good credit, after which you’ll want to convert to a traditional credit card with lower interest rates and better terms.
Second, not all secured credit card issuers report to all three major credit reporting agencies. Because you’re establishing credit for the first time, you want to make sure the card is reported to the three main credit bureaus — Equifax, Experian and TransUnion — so you’re getting credit for managing the account responsibly. Remember, if it’s not in your credit reports, the account won’t factor into your credit scores and it won’t help you establish and build great credit.
What Is a Student Credit Card?
Lots of big issuers offer starter plastic specifically geared toward students. These cards are generally unsecured — meaning they don’t require a deposit as collateral. They do, however, come with lower credit limits, so new cardholders can’t get themselves into too much trouble. Just be aware: If you are a student looking for a credit card, you may need a little help qualifying. Under the CARD Act of 2009, anyone under 21 must demonstrate their ability to repay (via some sort of income) or have a willing co-signer in order to get a credit card.
What Should I Look for in a Student Credit Card?
Again, your aim is to build credit, so it’s best to opt for a no-frills card. Issuers are hankering to establish financial relationships with new marketplace entrants, so there are quite a few student credit cards that offer no annual fee and competitive annual percentage rates (APRs). There are also some that offer rewards. If you are interested in points, miles or cash back, consider cards that pay out for smart spending habits (like making on-time payments) or a good GPA.
How Do I Use my First Credit Card Responsibly?
No matter what type of card you wind up getting, you’ll want to stick to two primary rules to ensure you build good credit:
1. Make your monthly payments on time, every time. Your payment history accounts for 35% of your credit score and paying late or missing payments can have a detrimental impact your credit standing. This may sound obvious, but the first step to establishing great credit is to make your payments on time, every time — no exceptions.
2.Keep your balance as low as possible. A significant portion of your credit score factors in the percentage of your balance in relation to your credit limit on your credit cards (often referred to as your revolving utilization). In short, the lower your revolving utilization, the better your credit score, which means you’ll want to keep your balances to a minimum. Keep in mind that secured cards and student credit cards often have very low credit limits, so even a balance of just a few hundred dollars can often wreak havoc on your credit scores. To earn the maximum number of credit score points, you’ll want to limit your credit card spending to no more than 10% of your credit limit. As an example, if you have a credit limit of $1,000, you would want to keep your balance from going over $100. (Even if you pay it off every month, you wouldn’t want the balance to go over $100 if your primary goal is to boost your credit scores.)
What’s an Authorized User?
There’s another option worth mentioning when it comes to getting a credit card with no credit. Most issuers allow their credit cardholders to add an authorized user to their account. This person gets their own card and, as such, can make charges, but they’re not responsible for paying the bills. That job still falls to the primary credit cardholder. Becoming an authorized user on friend or family’s credit card can help you build credit, because the account should appear on your credit report. As with secured credit cards, if you’re being added to an account in the hope of building credit, it’s a good idea to ask the issuer if they report authorized users to the credit bureaus. If they do, you will get “credit” for all of the good information associated with the account.