Best Credit Card to Build Credit

If you have a bad credit score, you may assume that a bank won’t approve your application for a credit card. This, however, couldn’t be farther from the truth.

Bad credit—which is a score of 579 or lower—can make it harder to get financing. And if you’re fortunate enough to get financing, you’ll probably pay a higher interest rate. But despite the hardships that come with having a low score, there are plenty of options available to you. Many banks are willing to extend credit, which can help erase your negative credit history. Here is what you need to know about credit cards to build your credit history.

Discover the Best Credit Cards

Why Care About Your Credit Score?

Some people with a history of bad credit may feel that their credit is beyond repair, so they don’t even try to improve their score. However, bad credit is reversible, and there are good reasons to care about your credit score.

Having a high credit score can make it easier to purchase a house with a mortgage loan, which can be a steppingstone to financial stability and greater personal wealth. Additionally, once you build your credit score, it becomes much easier to get other the types of credit, such as student loans, auto loans, and personal loans.

When opening an account for utilities (gas, electronic, water, etc.) or getting a cell phone contract, it is also customary for companies to run a credit check. One benefit of a high score is being able to open these accounts without having to pay a security deposit, or only having to pay a small deposit.

Likewise, good credit can also help you get cheaper insurance premiums. And most importantly, a high credit score gives you a sense of accomplishment, especially when you’re able to increase your score after a credit disaster.

If you don’t know where you stand credit-wise, check your personal credit score and credit reports (at least once a year). Order free copies of your reports from Annual Credit Report. From here, you can determine areas that need improving.

Pros and Cons of Credit Cards for Rebuilding Credit

  • Fresh start. The biggest advantage of a credit card for rebuilding credit is the opportunity for a fresh start. Regardless of the mistakes you’ve made in the past—whether you’ve filed bankruptcy or experienced a foreclosure—these credit cards allow you to start anew and prove that you’re capable of managing a credit account. Only apply for a credit card if you’re committed to making better financial and credit decisions, or else you could risk further damage to your credit score.
  • Adds positive activity to your credit file. As you make a fresh start, you’re also recognized for good credit management. Each month, the credit card company issuing your credit card will report your most recent activity to the credit bureaus. To increase your amount of positive activity, pay your bill every month on or before your due date. Your credit card issuer may report a late payment if your account becomes 30 days past due. Late payments damage your credit score and make it harder to build a strong credit history.
  • You may receive a lower credit limit. Since you’re rebuilding your credit score, don’t expect your credit card issuer to give you a high credit limit—at least not yet. As you develop a regular pattern of managing your account responsibly, the credit card company may periodically review your account and gradually increase your credit line.
  • Higher interest rates. Because you have a history of poor credit, you may also pay a higher interest rate. Whereas a person with good credit can qualify for the most favorable interest rates, you’ll pay more for the privilege of having a card. Don’t let this discourage you. As your credit score improves, you can then apply for cards with more competitive, attractive rates. In the meantime, don’t acquire too much debt, and pay off the card monthly to avoid expensive interest charges.
  • You might have to pay a security deposit. Secured credit cards are a type of card for rebuilding credit. These cards do require a security deposit, so make sure you plan ahead for this added expense. Security deposits are required at the time of application and can range from $200 up to $500 or more.
  • Some cards charge additional fees. In addition to a higher interest rate and a security deposit, some credit cards for rebuilding credit charge others fees, such as a one-time setup fee, monthly maintenance fees, and annual fees. These fees increase your out-of-pocket expense. Compare at least three to four different credit cards to find options that charge the least amount, which can save you money in the long run.

Limited reward options. Rewards programs are common among credit cards tailored to people with good and excellent credit. Some credit cards for rebuilding credit also have a rewards program, but these programs may not be as appealing as those offered by other credit cards.

Basic Tips for Rebuilding Your Credit

If you’re looking to build your credit, getting a credit card is only the first step. For a positive outcome, you must be accountable and manage this credit account responsibly. Here are a few tips for rebuilding your credit history.

  • Check your credit report. Get into a habit of ordering copies of your credit reports at least once a year. Request copies from the three major credit bureaus, or order your copies online from AnnualCreditReport.com. Take note of any errors or fraudulent information on your reports, and then file a dispute to have these items removed from your report. Reporting mistake can reduce your personal rating and make it harder to get credit.
  • Pay bills on time. Payment history makes up 35% of your credit score. Under no circumstances should you submit a late payment. Put your accounts on auto-pay to guarantee timely arrivals. If you’re faced with payment problems, notify your credit card issuer immediately to set up alternate payment arrangements. This measure can keep your account in good standing.
  • Limit your credit inquiries. Applying for too many credit accounts in a short period of time can also lower your credit score. Only apply for one credit account every six months. To avoid excessive inquiries, decline offers to open a store credit account when shopping at retailers.
  • Pay down debt. You can also improve your credit score by minimizing your credit card debt. Maxing out your credit cards or keeping your credit card balances close to your limit is both detrimental to your score. Since too much revolving debt can reduce credit ratings, get into a habit of paying off your bills in full every month and don’t charge more than 30% of your credit line.
  • Don’t cosign a loan. As your credit score improves, you might be approached and asked to cosign a loan for someone. Respectfully decline this request. Cosigning a loan is dangerous because you’re responsible for the debt if the other person defaults. A cosigned debt will also appear on your credit report, which can increase your debt-to-income ratio.
  • Pay non-credit bills on time. Not only should you pay credit accounts on time, you should also pay non-credit accounts on time. These include cell phone bills, utilities, and insurance payments. These creditors don’t report positive information to the credit bureaus on a monthly basis, but they may report negative activity if you break a contract or don’t pay what you owe.

Be patient. Understand that bad credit isn’t an overnight fix. It may take anywhere from 12 to 24 months to move from bad credit to good credit. Be patient and maintain good credit habits as your score improves. Check your credit report every few months to monitor your progress.

What to Look For, and What to Avoid When Shopping for a Card?

If you’re applying for a credit card to rebuild your credit, look specifically for cards offering a rewards program. This way, you’re able to get something in return for everyday use. As mentioned, rewards programs with a credit builder credit card aren’t as elaborate. Still, there’s the chance to earn points or cash back on purchases, which can ultimately save you money. The more you use the card, the more you can earn. Of course, this doesn’t suggest overspending. Set a monthly spending limit and only charge what you can afford.

Also, you should search out credit cards offering the most affordable interest rate based on your credit rating. Don’t expect to get the most favorable rate if you have bad credit; but if you shop around and compare different cards, you can likely find a card with a reasonable rate.

Ideally, you should pay off your card in full every month to avoid interest. If you do carry a balance from month-to-month, aim for a low-rate card to save hundreds over the course of the years. In addition to comparing rates, always compare credit card fees to avoid paying more than you need to. This is pivotal if you’re applying for a secured credit card because these cards tend to have higher fees and additional costs.

Also, the credit card company you choose to build a relationship with should report your credit activity to the bureaus on a “monthly” basis. Some smaller banks offering credit cards don’t report to the bureaus regularly, and others don’t report at all. Since the objective is rebuilding your credit history, you need as much positive activity on your credit reports as possible.

Before applying for any card, call the bank and speak with a representative. Ask how often the bank reports to the bureaus. If the bank only reports quarterly or never, you’re better off getting a card with another bank.

If you decide on a secured credit card, inquire as to when the credit card company may graduate your account to an unsecured credit card. This typically happens after the first 12 to 24 months, providing you’re able to maintain a good payment record and demonstrate creditworthiness. At this point, the credit card company will refund your security deposit.

Rebuilding Credit Card vs. Prepaid Credit Card

As you search for a credit card, you might stumble upon prepaid cards advertised as a credit card for people with no credit or bad credit. Although many prepaid cards have “credit” in their titles, these are not credit cards. Prepaid debit cards don’t involve a credit line, and the bank behind the card doesn’t report activity to the bureaus.

Instead, these are debit cards that require making a cash deposit onto a card. And as a debit card, you can only spend what you put on the card. This is convenient, but at the same time, prepaid credit cards don’t build or rebuild a credit score. Therefore, these cards are a waste of time if your sole purpose is building or improving your credit history.

Who Should Get a Credit Card to Rebuild Credit?

Credit builder credit cards are available to anyone with bad credit or no credit history, but they might be particularly beneficial if you’ve filed bankruptcy in the past and you’re looking to start over and reestablish your credit history. If a bankruptcy wiped out or reorganized your previous debt, a credit rebuilding card will be easier to get because these cards allow for a lower credit score.

These credit cards might also be a good fit if you’ve made bad credit decisions in the past and couldn’t pay what you owed, or if your credit suffered due to situations beyond your control like a job loss, a divorce or an illness.

Conclusion

Regardless of the circumstances surrounding bad credit, if you don’t currently have a credit account and you’re looking to improve a low score, a credit rebuilding card can be the first step to a brighter financial future. But again, your credit score will only improve if you learn how to manage credit responsibly. Always pay your bills on time, don’t apply for too many accounts and maintain low credit card balances.