Building credit while still in or just out of college can be tricky. Solid credit history will make you more qualified for a home or car loan, and a better score will get you a lower interest rate and could even qualify you for lower homeowners or auto insurance premiums. While there are other ways to establish credit, a credit card is generally the simplest and most useful tool to do so.
But in many cases you can’t get a credit card without having an established credit history. It’s kind of circular logic: How can anyone build credit history without a credit card? The trick is finding the right type of card for your situation without falling into a credit trap that could land you in serious debt.
You might be using a debit card, but since that money comes straight out of your bank account, it’s not the same as buying on credit and doesn’t help with your credit score. However, if you already have a relationship with a bank, you might be able to use that to your advantage, says Bethy Hardeman, chief consumer advocate at Credit Karma.
“Banks like to reward their customers. You may want to consider applying for a student or other entry-level credit card with the bank you have a savings or checking account,” she says. “Your bank may be more willing to approve you for a credit card because you are a long-time customer.”
Store cards – the kind you might be offered when you check out at your favorite clothing store – could also help you build credit, but expert opinions are mixed. They do help you establish credit, but they also encourage more spending, generally have very low credit limits, and can usually only be used at one store or network of stores.
When you have no credit history, your primary goal isn’t to get the highest rated card with a huge spending limit and signup bonus. Your goal is to show lenders that you are trustworthy and capable of paying your bills on time.
“For many young people, their credit is just beginning, so they should aim to avoid mistakes that will take a long time to fix,” Hardeman says. “Diligently establishing and building credit carefully with credit cards, student loans and regular on-time payments will put them in a great place in just a few years. I have an excellent credit score just from paying off my credit cards over the years.”
GoodCall has put together a full guide to building credit, but here we’ll look at credit cards that are good for people who need to build credit from nothing or repair some bad history.
Note that the Credit Card Accountability Responsibility and Disclosure (CARD) Act of 2009 prohibits companies from issuing a card to anyone younger than 21 without either a co-signer or proof of income.
Tips to keep in mind when getting your first card
Here are a few other things to keep in mind when looking for the card that’s right for you:
- Don’t apply for a bunch of cards at once. That will cause multiple hits on your credit report and lower your score. Do plenty of research, look up your credit score, and select just one card to apply for that is appropriate for your level of credit.
- Lower interest rates are good, but paying off your balance each month without interest is better.
- Be wary of 0% introductory APR offers. It’s a nice perk, but you don’t want to get in the habit of letting your balance go unpaid.
- Don’t get lured by fancy rewards without looking at all of the card’s terms. Cash back rewards are designed to encourage more spending. Right now, you need to focus on keeping a relatively low balance that you can pay off every month. (But if you’re comparing two cards that are otherwise about the same, don’t pass up free cash!)
- Try to avoid a card with an annual fee. That’s less money in your pocket, and there are plenty of entry-level cards that don’t have a fee.
- Keep an eye on your credit limit. If you’re worried about charging more than you can afford to pay off each month – and you should be – watch it. As you show you can make regular payments, your card issuer will likely offer to raise your limit. It’s an attempt to get you to spend more than you can afford and carry a balance that will accrue some interest. Don’t fall for it.
- Don’t spend as much as you can… If you max out your card, even if you pay it all off before the month’s over, your credit is likely to take a hit. That’s because the credit card company doesn’t necessarily report your balance at the end of the month after you’ve made your payment. You want your balance to be pretty low relative to your credit limit at all times. A general rule of thumb is no more than 30% utilization.
- … But make sure you actually use your card. Keeping a low balance isn’t the same as no balance. If you never use your card, you probably won’t see a negative effect on your score, but you won’t see it grow, either. You aren’t proving you can consistently make payments if you aren’t making regular charges on your card. If you’re really trying to avoid debt and don’t feel comfortable paying for general expenses on credit, consider setting up automatic payments for your utilities or cable bills, which you’ll have to pay every month anyway.
Best credit card for students
Journey Student Rewards
Type of card: Visa
Issuer: Capital One
Annual Fee: $0
Rewards: 1% cash back, or 1.25% when you pay on time.
Credit Limit: $300+
Late fee: $35
Why we like it: There are a lot of great credit cards out there for students, but Capital One’s Journey Student Card stands out to us for one really great reason: You get a higher cash-back bonus rate if you pay your bill on time. If you’re young and new to credit, now is the time to focus on wielding it responsibly. Capital One’s decision to incentivize paying on time shows this card is a great one for learning good credit card habits early. It has no annual fee, and Capital One allows you to select the monthly due date that works best for you.
But…: The Journey Student Rewards card does have a relatively high interest rate, so if you expect you might need to carry a balance on the card regularly, you might look for another option with a lower APR. Also, the 1.25% cash back is a fairly low rate these days, and some other cards, like the Discover It Student card, offer much higher cashback rewards.
The Discover It Student Card has 0% APR for the first six months, an annual $20 bonus for students who maintain a high GPA, no penalty for the first late payment, 1% standard and 5% bonus cash back and a cash back match after the first year. It’s a great card but has a higher APR (22.24%), and the higher credit limit (minimum $500) and cash-back bonus might entice you to spend more than you can afford to pay off each month, especially while you’re still in school. It’s also worth noting that the Discover It For Students is listed as the top choice on The Simple Dollar’s analysis of the best credit cards for students.
The Citi ThankYou Preferred Student Card from Citibank is a big draw for students because of its 2% rewards bonus for restaurants and entertainment, as well as a flat 1% on all other purchases. It also comes with a 2,500 point ($25) bonus if you spend $500 in the first three months, no annual fee, and has no interest for purchases in the first seven months. But the card has a slightly higher max APR of 24.24% (though you might qualify for lower) than other student cards. As with all cards, be wary of bonuses that encourage spending, but don’t miss out on putting more money in your pocket when you can.
The Upromise MasterCard by SallieMae from Barclaycard offers a 0% introductory APR and has fairly generous cash back rewards: 1% cash back on every purchase, 2% back on department stores and movie theaters and 5% on online purchases and dining. All of that comes with no annual fee and an interest rate based on your credit, from 14.24% to 23.24%. But a Upromise membership is required to earn and receive cash back, though the program is free to join. The potentially low interest rates and cash back make this card a good option, but be wary of the draw of spending with the 0% intro APR.
Best credit card for bad credit
Discover It Secured
Type of card: Discover
Annual Fee: $0
Rewards: 1-2% cash back
Late Fee: $37
Minimum deposit: $200
Why we like it: For those whose credit rating is too low to get a traditional credit card – or even for those just starting out with limited history – a secured credit card might be the way to go. With a secured card, you’ll give the company a deposit and then you’ll get a card that usually has a credit limit equal to that deposit. The Discover It Secured card has no annual fee and offers 1% cash back plus 2% back on gas and restaurant purchases – and Discover will match your cash back total in the first year. You’ll get a credit limit equal to your initial deposit, with a minimum of $200. After a year, if you’ve proven you can make payments on time to Discover and other debtors, you could be eligible to get your deposit back and transition to an unsecured account.
But…: The It card has a pretty high interest rate. You can generally find a card with a lower APR if you get one that carries an annual fee. But you should be aiming to pay off your balance each month without interest, so we favor cards with no annual fee. We’re also wary of cards that promote spending with rewards for users who already have bad credit. Use with caution.
The Citi Secured MasterCard is nearly on par with the Discover secured card. It has a credit limit equal to your initial deposit, with a minimum of $200 required. It has a slightly lower interest rate (22.24%) and late fee ($35) compared with the Discover secured card, but comes with no cash-back rewards. If you’re worried about your spending getting out of hand with cash-back bonuses, this card from Citibank might be a good alternative.
The Secured MasterCard from Capital One offers more flexible deposit options, where you can qualify for as little as $49 or up to $200, based on the state of your credit. That flexibility does come with a higher interest rate (up to 24.99%), and the card offers no cash-back rewards. Credit limits can range from $200 to $3,000. If you can qualify for the lower deposit, this card has the benefit of lower upfront out-of-pocket cost. Just watch your balance with the higher APR.
The OpenSky Secured Visa card might be a good option for some users who seek a significantly lower interest rate, though it does come with a $35 annual fee. At just 17.64%, it’s one of the lower APR rates you’ll find with that relatively low annual cost. Depending on your debt situation, that $35 fee might be worth it if you’re transferring a balance from another, higher-interest card. Credit lines range from $200 to $3,000 and are equal to the amount you can deposit up front. The lower $27 late fee might be worth noting as well.
Best all-around card for building credit
Type of card: MasterCard
Issuer: Capital One
Annual Fee: $0
Credit Limit: $300+
Late Fee: $35
Why we like it: Most cards available to people with bad credit or no credit have annual fees and high interest rates. While the interest rate on Capital One’s Platinum Credit Card is high, it lacks the kind of predatory practices many credit card issuers include in contracts, such as zero APR and glittery cash-back options. And it comes with no annual fee, which means more money in your pocket at the end of the year. Pay off your balance each month and the high interest rate won’t hurt you. You might also benefit from Capital One’s flexible payment option, which allows users to select the monthly due date.
But…: If you expect a big upcoming purchase or need to carry a balance that would accrue interest, you might want to shop around for a card with a lower interest rate – just know that most unsecured cards for limited or bad credit have high rates and/or annual fees.
The QuicksilverOne Cash Rewards Card offers a lower interest rate (23.24%), 0% APR for 9 months, and 1.5% cash back. But those rewards come at a cost – a $39 annual fee. You’ll have to spend at least $217 a month just to cover that annual fee. But if your income can support that kind of spending, it can be a great option. Just don’t get drawn into spending more than you can afford to get the bonus cash.
The Barclay Rewards MasterCard has a slightly higher APR (25.24%) compared with other cards in its credit range, and might not be available to those with the worst credit. But it has no annual fee and offers 1% cash back on every purchase, plus 2% back on gas, utilities and grocery store purchases. Its website says it usually requires at least a fair credit rating, with a score above 620. If you can qualify, it’s a good card to have.
The Indigo Platinum Card from Celtic Bank sells itself as a card for people with less-than-perfect credit. Users can pre-qualify with no impact to their credit score and may qualify for an account with a reduced or no annual fee (if not, the annual fee is $75 for the first year and $99 after that). The interest rate (23.9%) is about on par with other cards available in this credit score range, as is the $37 late fee.
Ultimately, your goal in getting one of these credit cards shouldn’t be to rake in rewards or go on a shopping spree. Keep your spending in check, pay your balance off every month on time, and wait. It’ll take several months to a year to see real results, but soon enough you’ll be ready to qualify for more diverse types of credit, such as a car loan, mortgage, or even one of those fancy rewards credit cards. And when you are ready for a new card, don’t rush to close your first one – that’ll actually shorten your credit history again and lower your score.
Best Credit Cards for Building Credit
|Card||Interest Rate||Annual Fee||Good for…|
|Journey Student Rewards||20.24%||$0||Students|
|Discover It Secured||23.24||$0||Bad Credit|