Credit cards come with a bad reputation in the personal finance world.
They make it easy to spend more than you can afford. Balances add up faster than you can manage them, leaving you in debt.
Then there are the high interest rates, the fees, and all the fine print that could leave you in a bad financial spot.
But what if we told you that a credit card can be so much more than a money-eating monster?
Many people paint credit cards with a broad brush that labels them all “bad.” But credit cards are simply financial tools.
They are neither good nor bad on their own. It’s all about how you use your plastic that determines if it will be a positive or negative force in your financial life.
The Benefits of Using Credit Cards
Credit cards offer responsible users a lot of benefits. For one, credit is safer to use than debit or cash.
When you use cash, that money is gone. There’s no one to dispute a charge with. You must rely on the merchants you shop with to honor their word if you buy something defective and end up needing to return it.
And if someone steals your cash? Needless to say, it’s not exactly easy to get it back.
Debit cards are a little safer. Banks do provide consumer protections and you can dispute charges and fraud.
But debit cards link to your checking account. Thieves have direct access to your money if they steal your information.
While it’s easier to remedy the situation than problems involving cash, it’s hugely inconvenient when money wrongly goes out of your checking account.
Credit cards, on the other hand, offer a much higher level of consumer protection.
Most credit card companies don’t hold you liable for fraud and you can dispute any charge. Plus, charging something to your card is not the same as using cash. You have a grace period to pay off the credit card balance.
Your cash doesn’t leave your pocket until you say it does.
And credit cards offer perks for your everyday spending. You can earn rewards, discounts, and cash back. That allows you to stretch your dollars 1% to 5% further than when you shop with cash or debit.
Convinced you can responsibly use a credit card and start building great credit for yourself? Great! It’s time to apply for the right card for you.
Right? Not so fast if you’re one of the 45 million Americans with no credit at all. There are a few more steps to take between today and getting a credit card with no credit.
What Do You Mean, No Credit?
People with credit scores can have anywhere from poor to excellent credit. Credit scores range from below 579 to above 800.
Your credit score depends on how you’ve used and managed credit in the past.
Credit reporting agencies take five factors into account when determining your score: payment history, credit usage, credit age, new credit accounts, and type of credit.
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. Learn more about FICO credit score|
But what if you’ve never established a line of credit? Let’s say you have no previous history with borrowing money.
You don't have a revolving credit line (like a credit card) or an installment loan (like a student loans, an auto loan, or a mortgage).
In this case, you have no credit score - and no credit.
Don’t assume you don’t have credit even if you’ve never taken out a credit card. Student loans are a type of installment loan, and give many people the start of their credit history.
You can confirm whether you have credit by pulling your credit report.
You can request your report for free once per year at AnnualCreditReport.com. This will show any credit accounts you may have.
What to Do If You Want a Credit Card, But Have No Credit
So you pulled your credit report and confirmed your suspicions: you have no credit. But you want to get a credit card! Is there anything you can do?
The good news is yes, there is absolutely something you can do. There are cards available specifically designed to help people start building a credit history. They're called secured credit cards.
In order to get a secured card, you have to deposit cash as a security deposit.
This is how you can get a card without worrying about your credit score.
This benefits you if you’re new to credit because you can’t spend more than the cash you deposit. That means you don't have to worry about falling into debt.
If you’re in college, consider a credit card designed specifically for students.
These cards often give first-time cardholders a lot of leeway.
You can get benefits like waived fees the first time you’re late on a payment.
They may also allow you to get the card with a cosigner. Having someone else on the card makes it easier to qualify when you have no credit of your own.
Student credit cards help build credit because they're easier to be approved for than regular credit cards and they allow you to establish a history.
Of course, it’s up to you to use a credit card to build good credit. That means paying off the balance on time and in full each and every month.
The Best Credit Cards for People with No Credit
There are a lot of credit card options out there. When it comes to choosing your first card to help you build credit, some are better than others.
We helped you narrow down the list by providing our three favorite credit card options for those who don't have credit.
Discover it Secured Credit Card
The Discover it Secured Credit Card is one of the best available if you want to build credit.
The card has no annual fee, although you need to make an initial $200 cash deposit to start using it.
Most secured cards don’t allow you to earn rewards like unsecured credit cards do.
But the Discover it Secured Credit Card is the exception. You earn 1% cash back on all purchases. And you can get 2% back when you spend on gas and at restaurants.
And Discover helps users advance to the next level when they’re ready.
After a year of using this card and going from no credit to credit history, you can be eligible to upgrade to a standard card.
Capital One Secured MasterCard
This is a good secured credit card alternative to Discover’s card. The Capital One Secured MasterCard only requires a $49 cash deposit, so it’s more affordable.
You can also track your progress as you use this card since you get free access to your credit score.
You can watch that improve as you build a credit history with on time and in full payments.
There’s no annual fee, and you can even pick your own due date to pay your bill each month.
Discover it for Students
If you’re a student, consider the Discover it for Students card. This card gives you a lot of opportunities to earn cash back, including:
- 5% back in certain categories that change each quarter
- 1% back on everything else
You can even earn a $20 cash bonus for good grades! Maintain a 3.0 GPA each school year to get your bonus.
There’s also no annual fee and there’s a 0% APR on your purchases for the first 6 months.
How to Use Credit Cards to Build Credit
Remember, credit cards are financial tools. They are neither good nor bad all on their own.
It’s your responsibility to use them wisely to build a good credit score. If you need help getting started, keep these tips in mind:
Make all payments in full and on time.
Your payment history determines 35% of your credit score.
It’s critical that you pay off your statements when (or before) your bill is due. And make more than just the minimum payment! Aim to pay off your entire balance every month.
This is why it’s important to only charge what you can actually afford to repay.
Stick to a budget and use your credit card like cash. Otherwise, you may not be able to afford to repay your balance - and that’s when you start racking up debt.
Don’t use all of your available credit.
30% of your credit score is based on your credit utilization ratio, or the amount of credit you use from the amount you have available.
If you have a $1,000 credit limit, for example, you should try not to maintain a balance of more than $300.
Once you hit $300, you need to pay the balance off. $300 is 30% of your credit limit - and a good credit utilization ratio should be right around 30%.
Eventually, establish a different type of credit.
Once you get comfortable managing your credit card, you may want to look into getting other lines of credit.
You may eventually want to take out a car loan, or you may need student loans to get through undergrad or graduate degree programs.
Both of these types of loans are installment loans. Credit cards are revolving lines of credit. Having a mix of these types of credit will eventually help boost your score.
Of course, you don’t need to take out loans just for the sake of having different types of credit. Only borrow money when you need to!
Be careful how many new accounts you open.
Opening lots of lines of credit at once will ding your credit score. Plus, multiple new accounts can be difficult to manage.
You may be more likely to miss a payment or end up carrying a balance. It’s a slippery slope into debt from here, so use caution.
Use the Right Credit Card to Start Building Credit Today
You need a complete financial toolbox if you want to reach success. Credit cards can help you manage your money - but only if you use them wisely.
Even if you have no credit, you can start building your credit history by choosing the right secured credit card.
This will help you learn how to manage your credit without risking charging more than the cash you have to use.
Once your new card is in hand, start building a positive credit history.
You can do this by paying on time and in full, not charging too much to your card at once, and only opening new accounts as you need and will use them.
You should be well on your way! With the right card and responsible use, you can go from no credit to great credit over time.