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Best Credit Card for No Credit
- Pros of Credit Cards for No Credit
- Cons of Credit Cards for No Credit
- What are the Options for Establishing a Credit History?
- What to Look for When Applying for a Credit Card With No Credit?
- Tips for Building a Strong Credit History
When you apply for any type of financing, it is customary for a creditor to check your credit report and your credit score. This is how they gauge whether you’re likely to repay a debt. If you don’t have a reported credit, however, there’s no way for creditors to know your creditworthiness.
In this case, having no credit can be just as bad as having bad credit, and some creditors might reject your application due to lack of a credit history. Fortunately, getting a credit card that’s designed for people without a credit history can help you establish a credit file and eventually put an end to credit rejections.
People who have a lengthy credit history and a proven track record of successfully managing credit can get credit easier than someone with no credit history. Yet, some people aren’t concerned with building credit and they prefer paying for everything with cash.
On one hand, using cash or a debit card can alleviate debt because you can only spend what you have. But on the other hand, having no credit score could also prevent financing a car or buying a house.
Building credit is easier than you might think. If you’re contemplating a major purchase and you’ve yet to establish credit, applying for a no credit history credit card can jumpstart your credit file.
Pros of Credit Cards for No Credit
- No credit check. Whereas other types of credit cards may require a credit check to determine whether you’re eligible for an account, some no credit cards don’t involve credit checks. Regardless of whether you have no credit or bad credit, you can get approved for a card as long as you have stable income and employment.
- Build your credit history. A credit card for no credit is an excellent tool for establishing your credit history. Once you get the credit card, use it on a regular basis for everyday purchases to keep your account active. Make sure you pay at least your minimum payment every month to keep your account in good standing. This adds positive activity to your credit report which is necessary for a strong credit score.
- Enjoy cardholder benefits. You can also enjoy certain cardholder benefits once you open a credit card account. Look for credit cards that offer a rewards program and earn miles, points or cash back on every dollar you spend. Other cardholder benefits to look for include rental car coverage, an extended warranty, and purchase protection.
Cons of Credit Cards for No Credit
- Higher interest rates. Even though you don’t have bad credit per se, having no credit history can still result in a higher credit card interest rate. Low-interest rates are reserved for people with a history of successfully managing credit. Since this is your first credit account, it will take time to demonstrate your creditworthiness and qualify for a lower interest rate. Fortunately, credit card interest rates aren’t set in stone. Once you’ve had your credit card for a while, call your credit card company to see if they’ll reduce your interest rate. Your credit card company might consider a rate reduction after you’ve made timely payments for one or two years.
Low credit limit. If you’re applying for your first credit account, don’t expect a high credit limit. Credit limits are based on numerous factors, including your income and credit history. If you don’t have a credit history, your credit card company will likely assign a lower limit (perhaps under $500), and then gradually raise your limit as you demonstrate responsible credit habits.
What are the Options for Establishing a Credit History?
You must use credit to build a credit history. For this matter, the earlier you establish your credit history the better. Although getting a credit card is one of the easiest ways to establish credit, some people don’t think about building credit until they are ready to finance a house or a car. However, the best time to build a credit history is before you “need” credit for a major purchase—at least two years prior to a purchase. This gives you ample time to learn credit management and acquire a higher score, which can help you receive most favorable rates and terms.
Here’s a look at five options for building a credit history from scratch.
- Apply for a secured credit card
Secured credit cards are offered by many banks, and are one of the easiest types of credit cards to get with no credit history. These cards require a cash deposit, which is usually the equivalent of your credit line. Give the bank a $1,000 deposit and you’ll get a secured credit card with a $1,000 credit limit. Be mindful of the fact that secured credit cards aren’t prepaid credit cards. You will receive a monthly statement from your credit card issuer, and you’re required to make a minimum payment every month.
- Get a department store card or a gas card
Along with a secured credit card, getting a retail or a gas credit card is another option for establishing credit. These credit cards are also easier to get than unsecured credit cards. However, they tend to have higher interest rates, so make sure you shop around and compare at least three or four options before submitting an application.
- Ask your landlord to report rent payments
Renting an apartment or home doesn’t involve a line of credit or a loan, so rent payments don’t typically appear on credit reports. If you’re looking to establish credit, ask your landlord to report rent payments on your credit report, but only do so if you always submit your rent on time. Your landlord can report rental payments to Experian RentBureau. As a result, these payments will appear on your Experian credit report.
- Ask someone to cosign your credit card
Another option is applying for an unsecured credit card. Some banks will issue an unsecured credit card to people who don’t have a credit history, although you might need a cosigner. This is often the case if applying for a student credit card and you’re under the age of 21. If you’re at least 21 and have enough income to qualify for an unsecured credit card on your own, be prepared to pay a higher interest rate and receive a low credit limit.
If you have a cosigner, it’s imperative that you manage this credit card responsibly. This credit account will also appear on your cosigner’s credit report, so don’t max out the account and don’t send late payments. These actions could damage both of your credit histories.
- Become an authorized user
If you can’t get a credit card on your own, become an authorized user on another person’s account. As an authorized user, you’ll receive a credit card in your name and this account will appear on your credit report. You’re not the primary account holder, so you’re not responsible for the monthly payments. Even so, use this account responsibly and pay the primary account holder for any charges you put on the card.
What to Look for When Applying for a Credit Card With No Credit?
Credit cards for no credit history are not one-size-fits-all. Different cards come with different terms and features, and it’s important to understand all your options so that you select a card that’s right for your lifestyle. A few questions to ask yourself include:
- How much is the security deposit? If you’re applying for a secured credit card, make sure you understand how security deposits work. What are the minimum and maximum cash deposit required by the bank? Some credit card companies require higher minimum cash deposits, whereas others allow cash deposits as low as $250. Also, find out how often the bank reviews credit accounts to estimate when they’re likely to switch your account to an unsecured card.
- How much are credit card fees? Be aware that some credit cards for no credit history charge several fees. When shopping for a credit card, read the application carefully and look for information about annual fees, processing fees and setup fees. Fees are common with secured credit cards, and these are usually charged by credit card issuers to minimize their risk. Compare fees and choose a credit card that charges the least amount. Before agreeing to a credit card with an annual fee, research the card’s benefits to ensure the benefits justify the yearly fee. You can save money by selecting a credit card that waives the annual fee for the first year.
- What is the interest rate? Your credit history determines your credit card interest rate. If you don’t have a credit history, you may pay a higher rate. To minimize your costs, you should also compare the interest rates for different cards. Choose the card with the lowest rate, and get into a habit of paying off your credit card balance in full every month. This can eliminate or significantly reduce your interest charges.
Does the credit card issuer report to the credit bureaus? To build a credit history, it’s important that your creditors report your credit activity to the credit bureaus. The three major credit bureaus are Experian, TransUnion, and Equifax. Before applying, contact credit card issuers to ensure they will report your credit activity on a monthly basis.
Tips for Building a Strong Credit History
Getting a credit card is one of the first steps to establishing credit. To build a strong credit history, you need to understand factors that make up your credit score, and then learn how to manage your credit account responsibly.
- Pay your credit card bill on time every month. Your credit card issuer will send you a bill every month, and you are required to pay at least your minimum payment. Make a note of your due dates, and always pay bills on or before these dates. Set up automatic reminders or auto pay to ensure timely arrivals. This is important because your payment history makes up 35% of your credit score.
- Don’t carry a lot of debt. Maxing out your credit cards or keeping your credit card balance close to the limit can also hurt your credit score. The amount you owe makes up 30% of your credit score. To maintain a strong rating, your credit card balances should never exceed 30% of your credit limit. Avoid long-term debt by coming up with a monthly spending limit for your credit cards, and don’t exceed this limit. Only charge what you can afford and pay off balances every month.
- Maintain good credit habits. The longer you have opened credit accounts, the better your credit score. The age of your oldest accounts makes up 15% of your score. With that being said, it can take years to progress from no credit to excellent credit. In the meantime, never close your oldest accounts and continue to maintain good credit habits over the years.
- Don’t apply for too many credit accounts. Limit your number of credit applications to one every six months. This is important because new credit makes up 10% of your credit score, and each credit application or inquiry can reduce your score by two to five points.
- Diversify your types of credit. Your credit mix also makes up 10% of your credit score. People who have a positive history of managing different types of credit accounts typically have the highest credit scores. So while getting your first credit card is an excellent starting point, you should also apply for other types of financing in the future, such as an installment account.
There’s no rule saying you have to establish credit. But unless you’re okay with paying cash for everything (including a home or a car purchase), building your credit history is key to getting financing and acquiring the lowest interest rates and the best terms. Credit card issuers offer a variety of credit card solutions tailored to people with no credit history. Compare these offers, including fees, interest rates, and benefits. Once you receive a credit card, practice good habits by paying your bills on time and keeping your balances low.