Building credit is an important part of your financial future. However, you don’t get a credit score right away — it’s something you build over time with responsible behavior.
You must first establish credit, which isn’t always easy. You often need a credit card or loan in your name to help build credit, but you also need a good credit history to get most credit cards and loans.
Fortunately, there are credit cards designed to help you build credit, including secured credit cards, unsecured cards and store credit cards. You can even build credit by being an authorized user on someone else’s credit card.
Below, we’ll cover the best credit cards to build credit, but first we’ll explain how credit cards help build credit.
How a credit card helps build credit
Your credit score shows your financial responsibility over the past 7-10 years. The reason it’s so difficult to get approved for a credit card with no credit or bad credit is the financial risk you present to the credit card issuer.
Bad credit shows you’ve struggled with finances recently. Similarly, having little-to-no credit is risky because the credit card issuer has no indication of whether you’ll repay your debt.
When talking about credit cards and building credit, there’s a bit of a paradox. Irresponsible credit card use can damage your FICO credit score, which is the most commonly used credit scoring model by lenders. But credit cards can also play a significant role in building credit. That means you’re in control of whether credit cards help or hurt your credit score.
How you use your credit cards can negatively impact your FICO credit score in a few ways, including:
- Making late monthly payments
- Maintaining a high credit utilization rate
- Applying for too many credit cards in a 12-month span
- Closing your oldest credit card accounts
With responsible use, credit cards can help you build credit. Most credit card issuers report on-time payments and other positive details to all three major credit bureaus: Equifax, Experian and Transunion.
A credit card can lead to positive marks on your credit report if you:
- Make your payments on time
- Keep your balance under 30% of your credit limit
- Minimize your credit card applications
- Avoid opening and quickly closing credit card accounts
You generally need a good FICO Score to get approved for a traditional credit card. The challenge when building your credit is that a person with no credit score is often treated the same as one with a poor credit score. This can lead to frustrating rejections.
Fortunately, some credit cards are designed to help build credit when you have no credit history.
Finding the best credit card to build credit requires careful navigation of terms and conditions so you can find a card that matches your financial situation and goals.
Finding the best credit card to build credit
If you’re seeking the best credit card to build credit, there are plenty of options, including secured credit cards, unsecured credit cards and store credit cards. Another less traditional way to build credit through a credit card is by becoming an authorized user on someone else’s credit card.
Because there are many options, you may be tempted to apply for several credit cards. Curb this temptation because doing so can have a negative impact on your credit score. Instead, review the credit card details and terms to ensure a card is right for you and make sure you can get approved for it.
Key variables to consider when reviewing card details include:
- Introductory APR: This is the promotional APR the credit card will charge you for a predetermined introductory period, typically 12-18 months.
- Ongoing interest rate range: This is the interest rate range the credit card charges you after the introductory period expires.
- Security deposit requirement: This is the refundable amount you must give to the lender to secure against default. Finding a credit card with no security deposit is ideal, so you’re not paying a large sum upfront to establish your credit.
- Monthly and annual fees: These are fees the credit card company charges regularly. Some companies may waive the annual fee for the first year while others may have no fees at all.
- Cash-back rewards: These are points you receive for using the credit card that you can use toward free gifts, discounts, account statements, cash back and other rewards.
- Credit score requirements: This is the credit card’s minimum required credit score for approval. When establishing credit, you’ll want a card that will accept no credit score.
- Employment and income requirements: Because secured credit cards often work with folks with no credit at all, they want to verify you are employed and have sufficient income to warrant having a credit card.
Each credit-building credit card option — secured credit card, unsecured credit card, store credit card and becoming an authorized user — has its own set of pros and cons. Weighing these positives and negatives will help you choose the best credit card.
Secured credit card
A secured credit card offers you a credit line you can use to purchase items or pay for services, just like any other credit card.
Upon opening the account, you pay a refundable deposit, which is usually the same amount as the credit limit. The credit card issuer places the security deposit in an account and uses it to pay off the debt if you default on your card payments. The card issuer refunds this deposit when you close the account.
The credit card issuer may also offer to convert the secured credit card to an unsecured card once you’ve established a good payment history. At this point, the credit card issuer will also refund your security deposit.
Because the security deposit essentially eliminates all the credit card issuer’s financial risk, the credit requirements for a secured card are generally minimal. Most credit types are accepted, even those with poor credit scores or no credit at all.
Other than the security deposit, minimal creditworthiness guidelines and a relatively low credit limit, a secured credit card works like any other Visa, Mastercard or Discover.
How a secured card is like a traditional credit card
A secured credit card generally has a Visa, Mastercard or Discover logo, so they’re accepted virtually anywhere that accepts credit cards.
Some of the best secured credit cards come from well-known and trusted issuers, like Capital One and Citi, and offer many of the same perks as traditional credit cards, including:
- Cash-back rewards
- Insurance on rental cars
- Waived foreign transaction fees
- Discounts on select items
Secured credit cards aren’t always the right fit
One downside to secured credit cards is the upfront payment you must make to meet the security deposit. If you’re in a tough financial spot, this could be something you can’t manage.
You must also consider the fees associated with a secured credit card. Many secured credit cards charge an annual fee of $100 or more. Because secured credit cards typically have low credit limits, this $100 fee can use up a large portion of it. Sometimes, the credit card issuer will waive the annual fee for the first year, so make sure to check for this before deciding on a credit card.
On top of the annual fee, some secured credit cards also charge monthly fees. The monthly fee will vary between cards. Some have a flat fee and others charge a variable fee based on your credit card use.
Because secured credit cards deal solely with high-risk individuals, they tend to have higher-than-average interest rates.
Finally, if you plan to use a secured credit card as a stepping stone to an unsecured card, there may come a time when you want to cancel the credit card to stop the fees, get your deposit back and open a traditional credit card. If this is your only credit card or the card you’ve had the longest, closing it will lower your average credit account age and may negatively impact your credit score. The negative impact will be small, but when you’re building credit, every point matters.
Secured credit card pros:
- Easy approval with no credit
- Works like a traditional credit card
- Some offer cash-back rewards and other perks
- Can build credit quickly with responsible use
Secured credit card cons:
- Upfront security deposit
- Higher-than-average interest rates
- Monthly and annual fees
- Account closure can negatively impact your credit score
Unsecured credit card
Unsecured cards are the most common type of credit card, and they’re what most people think of when they think of a “regular” credit card. Most unsecured cards have strict creditworthiness guidelines, but some credit card issuers cater to people with credit struggles, including those who are just starting to build credit.
You still have to go through the traditional credit check for an unsecured card designed for people with no credit, but the credit card issuer has looser creditworthiness requirements. They may, however, have other requirements like having a bank account with the issuing bank, authorizing automatic monthly payments or being an active college student.
Unlike secured credit cards, unsecured cards have no security deposit, eliminating the upfront expense. Plus, they may offer special perks like cash-back rewards, discounts, rental car coverage and no foreign transaction fees. Unsecured cards also generally report to all three major credit bureaus, allowing you to build credit with responsible use.
Like with any credit card, the issuer uses your credit report and credit score to gauge the financial risk of approving you. With no credit, the credit card issuer can’t gauge this risk based on your credit history. Without an established credit history, the credit card issuer may treat your account as it would a high-risk account. This may result in a low credit limit and a higher-than-average interest rate.
With on-time payments and responsible use, you can eventually contact the credit card issuer and ask to have your credit line increased and negotiate a lower interest rate.
Another downside to using an unsecured card to build credit is they may include an annual fee, which can be $100 or more charged to your credit card account. Combine that with a low credit limit, and you may not have much of a balance left to use. Some unsecured cards waive the annual fee for the first year, so check the terms before applying.
Unsecured credit card pros:
- Doesn’t require a security deposit
- Can help build credit quickly
- Works like a traditional credit card
- May offer a cash-back rewards program and other perks
- Can negotiate a lower interest rate and higher credit line over time
Unsecured credit card cons:
- High initial interest rate
- Lower-than-average credit limit
- May require an annual fee
Store credit cards
Store credit cards are another option for credit building, as they sometimes have lower creditworthiness requirements. These credit cards come in two forms: open-loop and closed-loop.
An open-loop store credit card carries the retailer’s name but also has a Visa, Mastercard or Discover logo, meaning you can use it outside the retailer too. A closed-loop card lacks the Visa, Mastercard or Discover logo, and you can only use it with the retailer that issued the card.
Store credit cards can help you build credit, as they generally report your balances and payment history to at least one of the major credit bureaus. Unlike secured and unsecured credit cards, which tend to report to all three bureaus, they may only report the credit card details to one or two of them. If this is the case, you may not see your credit score increase across the board.
Store credit cards also tend to come with higher-than-average interest rates, leading to additional costs if you don’t pay off the balance in full every month. A downside to closed-loop store credit cards is that only being able to use them at the issuing retailer limits your ability to use the card and build credit.
Since these are retailer-specific cards, they often have special perks at the issuing retailer, including:
- 0% interest rates on certain purchases
- Gift certificates after charging a certain amount
- Exclusive discounts
- Early access to sales
If the retailer issues an open-loop card, these perks are often in addition to traditional credit card benefits like car insurance coverage, zero fraud liability and others.
Store credit card pros:
- Special perks at the issuing retailer
- Generally more relaxed credit history requirements
- No annual fee in most cases
- Open-loop store credit cards allow use outside the retailer
Store credit card cons:
- Closed-loop cards restrict you to just the issuing retailer
- Interest charges add up due to higher rates
- May not report to all three credit bureaus
Becoming an authorized user on a credit card is another way to build credit. It’s a low-risk option that helps you avoid the stress of rejections.
Most major credit cards allow the main cardholder — the person whose name is on the account — to give another person limited access to the account. Because there’s a lot of trust involved in giving someone access to your credit card account, the authorized user is usually a trusted friend or relative.
On top of giving the authorized user a credit card of their own, the credit card issuer may also report the credit card details to the major credit bureaus for recording on the authorized user’s credit report.
If the credit card issuer submits this information to the credit bureaus, the authorized user will see their credit score increase if the card has a good payment history and a credit utilization under 30%.
On the other hand, if the primary cardholder doesn’t use their credit card responsibly and submits late payments or carries a high balance, the authorized user may see negative marks on their credit report.
If you’re an authorized user, the main cardholder still has full control over the account and your usage. Many major credit cards allow the main cardholder to set spending limits for authorized users. The cardholder can also revoke the authorized user’s permissions and access to the credit line at any time.
Authorized user pros:
- No credit application
- Immediate potential credit score benefits
- No security deposit or annual fee
- Virtually guaranteed approval
Authorized user cons:
- Main cardholder can revoke authorization
- Not all credit cards report authorized users to the credit bureaus
- Main cardholder can limit your spending
- May be difficult to find someone willing to add you as an authorized user
First steps toward building credit
With a firm understanding of the various options for building credit by using a credit card, you now have the information you need to find the right credit card for you.
Figure out the features you want and need from a credit card, and list them in order of importance. Compare your list to the available unsecured, secured and store credit cards for building credit to find the best fit for you.
Finding a credit-building credit card that checks all the boxes on your list may be difficult, so you may need to make some compromises at this point. Once you’ve established a great credit score, you can be more selective about the cards you apply for.