Having no credit history can be such a catch 22. Without credit, you can't get a credit card or loan. But you can't build credit until you've shown positive payment behavior on a credit card or loan. So if you can't get credit without building it or build it without having it, how are you supposed to get your first credit card?
Since this is a problem that affects many, there are options in place to help. There are credit cards out there designed for first-time credit builders. They don't tend to come with a lot of options and rewards - but they do come with more lenient qualification requirements. What's more, you can use them to build credit until you can graduate on to a better credit card.
Does this sound like something that can help you? You're in luck! We've gone through some of the best credit cards out there. Why? To help you find the right credit card to help you build credit for the first time.
1. The Best Student Credit Card to Build Credit
Discover it® for Students is Best for College Students
If you're in college, then a student credit card is a great option to help you build credit for the first time. Discover it® for Students is a great place to start. With this card, you can earn 1-5% cash back on your purchases. That means you can earn rewards while you build your credit. Just make sure you don't carry a balance from month to month. Doing so can send you into debt and cost you much more than you can ever earn in rewards.
Discover it® for Students is also a great option because it doesn't charge a lot of fees. There's no annual fee, no foreign transaction fees, and no penalty APRs for late payments. You also get a free monthly FICO credit score update to help you track the improvements in your credit. Low fees, a free credit score, and the ability to earn rewards all make this card a great option for students.
Credit Card Rules that Affect College Students
College students don’t often have a credit history because lenders prefer not to lend to minors. In most states, contracts signed by those under 18 aren't legally binding. To help, student credit cards are designed to help young adults in school start building credit from scratch.
Generally, student credit cards work the same way as traditional credit cards. The main difference is that there are additional rules that apply to them. Under the Credit CARD Act of 2009, anyone who applies for a credit card must be at least 21 years old. Otherwise, the applicant must show sufficient proof of income or have a cosigner. A cosigner can be anyone 21 or older who agrees to share responsibility for repaying any debt on the account.Many people ask their parents or other family members to co-sign. This is not a light agreement to enter into for anyone. If the main applicant defaults on their payments, the co-signer has to pay.
How Student Credit Cards Help Build Credit
Student credit card account activity is reported to the three major credit bureaus: Equifax, Experian, and TransUnion. This means students can benefit from responsible credit card behavior. (The best behavior to show is keeping balances low and making payments on time.) As long as the credit behavior is responsible, then the student will see growth in their credit score.
FICO Credit Score Factors and Their Percentages
|FICO credit score factors||Percentage weight on credit score:||What it means:|
|Payment history||35%||Your track record when it comes to making (at least) the minimum payment by the due date.|
|Amounts owed||30%||How much of your borrowing potential is actually being used. Determined by dividing total debt by total credit limits.|
|Length of credit history||15%||The average age of your active credit lines. Longer histories tend to show responsibility with credit.|
|Credit mix||10%||The different types of active credit lines that you handle (e.g., mortgage, credit cards, students loans, etc.)|
|New credit||10%||The new lines of credit that you've requested. New credit applications tend to hurt you score temporarily.|
View the factors that make up your credit score in the table above. You might notice a section called "types of credit." That refers to the fact that having multiple types of credit can improve your score. If you took out a student loan or if you have an auto loan in your name, then you've already been building credit. Then, when you combine that with your new credit card, you'll be able to increase your score even more. Bonus!
When you think about building credit for the first time, weigh the costs and benefits. Although you can build credit by using a credit card, it won't help you if you go into debt on your credit card. In fact, debt hurts your score, thanks to something called "credit utilization."
Credit utilization is the amount of debt you owe in comparison to the amount of credit available to you. If your credit utilization is higher than 30%, then your score will go down. (Meaning your card balance is more than 30% of your total line of credit.) When it comes to credit cards, they only benefit you if you stay out of debt. And, if you carry a balance from month to month, the interest you'll pay will make it easier than you can imagine to fall into debt.
No matter what type of credit card you start with, always make your payments on time and never carry a balance. Then you can just sit back and watch your financial options grow as your credit score grows.
Runner-up Credit Cards for Building Credit
If the Discover it® for Students card doesn't work for you, don't worry. There are plenty of other options to get started with that can help you. Check out a few below:
2. The Best Card For Limited or No Credit History
Capital One® Secured MasterCard® Builds Credit with A Low Security Deposit
If you're not a student and don't have credit, the Capital One® Secured MasterCard® is a great option for you. This card makes it easy to begin building credit fast. Since it's a secured credit card, you'll have to put down a deposit as collateral. The good news you only need to put down $49 to get started. Whatever you deposit will become your credit limit, with $3,000 being the highest you can go. There's no annual fee to use this card.
How Secured Credit Cards Work
A secured credit card is a type of credit card that requires a security deposit as collateral. The security deposit cannot be used to pay off the monthly bill. However, the card issuer can seize the security deposit if you default on your payments. Here's the good news. Because of the security deposit requirement, these cards are easier to qualify for.
Even better, many card issuers don't pull your credit score when you apply for a secured card. Basically, the deposit alone does enough to mitigate against the risk of you defaulting.
While you don't have great credit to get a secured card, a secured card can help you increase your credit score. All your payment behavior on a secured card will be reported to the major credit bureaus. That enables you to use these types of cards to show positive payment behavior to build credit.
The Security Deposit Determines Your Credit Limit on a Secured Credit Card
With a regular unsecured credit card, the lender decides your card limit based on a few factors. These factors include your income, housing expenses, credit score, and account history. However, with secured credit cards,, your credit limit is equal to your security deposit. If you want a higher credit limit, you have to put more in as your security deposit.
It's important to note that the security deposit is for your lender, not for you. You can't just decide to pull your deposit out because you need it. The only way to get your security deposit back is to close the account.
There's good news, though. Some card issuers will also allow you to graduate from a secured credit card to an unsecured credit card. You simply have to prove that you’ve been managing your credit responsibly for about a year. At that time you may also be able to get your security back and get a card with higher limits and maybe even some rewards. This makes a secured card a great stepping stone - and it proves that it doesn't have to be a forever thing for you.
3. The Best Credit Card for those Without A Bank Account
OpenSky Secured Visa Doesn't Require A Bank Account
Don't have a bank account? That doesn't have to stop you from getting a credit card. The OpenSky® Secured Visa® Credit Card is a great option for those without a bank account who want a credit card.
How can you get a card without a bank account? Well, because this card accepts payments via wire transfer or money orders. No need for a checking or savings account to pay your bill.
There is a $35 annual fee for this card and the credit limits range from $200-$3,000. Like the cards above, this is best used as a starter credit card. This card can help you get to a point at which you'll have even better options in the future.
Annual Fees to Be Expected
Annual fees are no fun, but they're common in credit cards that are designed to help you build credit. However, there are often ways to have these fees waived. Read the fine print and don't be scared to negotiate when you open the card - or on the anniversary of opening it. You just might be able to save yourself some money.
Runner-up Credit Cards for People With No Credit History
So what happens if none of the cards above will work for you? Choose from many of the other great options out there, such as a few we have listed below.
The Best Thing You Can Do for Your Credit: Get Started
Starting out for the first time without credit is no fun. It can be frustrating to know you have to work your way up slowly. We all want credit options that can earn rewards and come with more flexibility as soon as possible.
The good news is, this beginning stage doesn't last forever. Just get started. Within a few months to a year, you'll see growth in your credit score. (As long as you use your beginning options responsibly, that is.)
Credit Cards for no Credit History
|Credit Card||Notable Feature||Who It's Best For|
|Discover it® for Students||Earn 5% cash back on certain categories that change every quarter.||Students who want to earn high amounts of cash back on various spending categories.|
|Bank Americard Cash Rewards for Students||Earn bonus cash back on gas and groceries.||Students who spend a lot at supermarkets and gas stations.|
|Capital One Secured||A secured credit card with an extremely low initial deposit requirement to help rebuild credit immediately.||People who have poor credit and don't have a lot of cash for a big security deposit.|
|Open Sky Secured||Does not require a bank account.||People with bad credit who don't have a bank account.|
|Capital One Platinum||Designed for people without good credit to help rebuild credit with no annual fee.||People with bad/average credit who want a credit card to improve their credit without a security deposit.|
|American Express Bluebird||Free prepaid account that offers check-writing.||People who want a low-cost alternative to a traditional checking account.|