Cards for Consumers With Limited To No Credit History
We all have to start somewhere. If you have never owned a credit card before, then this is where you can get started! We've got a list of prepaid debit cards that are great starter cards for those who want to build good card usage habits. Other offers on our list are secured credit cards that may help you with your goal of building credit. Of course, it's important to make sure that you use your cards wisely so that you don't accumulate debt. Besides, only the proper use of these cards can enable you to develop a solid financial foundation or credit history that would make you eligible for the best terms in financing in the future.
Got No Credit? Here's How To Build Credit Effectively
While it is true that few things in this world are more frustrating than having bad credit, the one thing that may top this is having no credit at all. Having no credit means that your financial history is "unknown" to a credit card company. You have absolutely no payment history in which they can base a decision on. Given this situation, many of these companies aren't comfortable with taking a gamble on individuals with no financial track record in the current economic climate. But the good news is that you can still obtain a credit card, even if you have no credit history whatsoever. You can certainly start somewhere and work yourself to a point where you've developed a decent credit history. Here are a couple of good tips to get going:
- Get a secured credit card. Secured credit cards are cards that extend you a line of credit based on some amount you deposit with the card issuer. These cards will often have a set limit that may be increased by additional deposits or by maintaining a good payment history. They allow individuals with no credit a chance to establish a good credit history. Also, they are easy to get. In a typical secured card scenario, you apply for a credit card with the issuer and make a deposit into a savings account held by that credit card company. In most cases, the deposit can be anywhere from a few hundred dollars to several thousand, and the deposit will usually earn interest. The card company will issue a credit card to you and will set the limit to match the amount of your deposit (or it may be slightly higher). As long as you make your regular monthly payments on time every month, the money in your savings account will be preserved. However, if you default, the credit card company will take control of your account and apply the funds against your outstanding balance. This way, there is little to no risk for the credit card company, which is what makes getting these cards easy for individuals with no credit. Also, many secured credit cards provide a report of your financial records to the major credit bureaus. This will allow the bureaus to begin tracking your credit and will allow you to get started with a credit history.
- Get a prepaid debit card. If you’ve got problems with no credit but would still like to use a card to manage your expenses, you may want to opt for a prepaid debit card. These cards are convenient to use but are tied to an account you establish with an amount that is equivalent to your card limit. There are debit card issuers that may pass your records over to the credit agencies, but there are those that don't. There are no guarantees that you will be building credit if the card you're using is a prepaid debit or reloadable card. We advise you to read the fine print to know if you will indeed gain points for establishing credit with the use of these cards.
- Get a "bad credit / no credit" card. This is a less desirable option than a secured credit card, but if you lack the funds needed to establish a savings account for a secured card, you can open an unsecured credit card account with a card company that specializes in lending to people with bad or limited credit histories. The drawback to this type of card is that the limit is generally set very low and the interest rates are high, making this one of the more expensive methods for establishing credit.
- Get a personal loan. Although getting a personal loan is not quite the same as obtaining a credit card account, establishing some payment history through a personal loan will help you obtain a credit card in the future, as long as you make your payments promptly each month. This option is usually less expensive than an unsecured credit card.
Developing good credit habits from the beginning is the key to creating a sound and secure financial future. While getting your first account can be tough and considerably more expensive than future credit accounts, it is well worth the effort. After a few months of making timely payments, you'll eventually be able to upgrade to a credit card with a higher limit and less expensive interest.
{ 10 comments… read them below or add one }
There are 2 basic options for ‘no credit’ cards. Prepaid cards may allow those unable to get credit cards to purchases online, and to teach your kids how to use and repay regular credit cards with accruing debt, but they don’t help your credit any.
OTOH, secured cards appear to help credit but require a deposit to compensate the risk of your credit line.
-Dan Malone-
I agree that these are a good option for someone just starting to build a credit record. I didn’t know there were so many. Good stuff.
Hey SVB,
Actually, I was considering signing up for a credit card – after not having had one in years – just to improve my credit. Any ideas which one might the best? I’m not planning on using it, but just want to have it open.
@James,
With good credit, you can apply for any type of card. I would go for a rewards card in your case since — just in case you decide to use it — you can get rewards (cash back or redeemable points). I actually prefer cash back rewards cards! I personally like Chase (particularly the Freedom card or Sapphire), Citi cards or Amex Blue.
If I were looking at prepaid cards verses secured credit cards I would ask what I hope to accomplish.
If the goal was to help build my credit score back, then a secured card is the way to go.
If the goal is simply to satisfy my need to have a card to make card purchases (online or other) or to teach myself about the concept of card use, a prepaid card is the way to go.
You do have to watch fees with prepaid cards, but that is going to change soon as regulation comes into the industry. However, if you buy from a reputable source, usually the only fee is the initial load fee of a few dollars – mainly covering the cost of the plastic. There may be an inactivity fee after a year but most people should use the cards by then.
We easily take for granted the cards we use online, for monthly expenses or regular shopping. I knew of someone who couldn’t make online purchases because she didn’t have a traditional credit card or bank account. I can also imagine just how much of a pain it would be if you’re a student who couldn’t pay for books or necessities while at Uni. I’d start out with a secured card which can be used in place of a regular credit card.
For people in certain situations with no credit (or still working to build their credit history), certain types of credit cards may help. They’re like credit card training wheels.
When you need to rebuild a good credit history, you’ll need a secured credit card that’s reported to the credit bureaus. Check with the creditor, because not all (most?) companies report their accounts to the credit agencies. If your credit standing is good, some banks might be willing to convert a secured credit card into an unsecured account. Ask your creditor if that’s an option for your secured card.
Thanks for the comments… I’d also add — I carefully read the terms and conditions for any card I’m interested in, prior to any application. Because these cards are usually intended for those with less experience with credit, new customers should make sure that they can handle any card charges, even if it’s just for a secured card. Note that APRs can change for a variety of conditions, such as a late payment or failure to pay.
Not sure about this advice because many of these cards have crazy fees. It might be worth the time to investigate alternatives like a debit card that’s linked to a good checking or savings account, preferably with a credit union.